Hoisington Investment Management Quarterly Review and Outlook, First Quarter 2014

By John Mauldin

In today’s Outside the Box, Lacy Hunt and Van Hoisington of Hoisington Investment have the temerity to point out that since the Great Recession officially ended in 2009, the Federal Open Market Committee (FOMC) has been consistently overoptimistic in its projections of U.S. growth. They simply expected QE to be more stimulative than it has been, to the tune of about 6% over the past four years – a total of about $1 trillion that never materialized.

Given that dismal track record, our authors ask why we should believe the Fed’s prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015 – particularly with QE being tapered into nonexistence. A big part of the reason the Fed has been so steadily wrong, say Lacy and Van, is its overreliance on the so-called “wealth effect,” which posits that an increase in consumer wealth – through higher stock prices or home values, for instance – will lead to increased consumer spending.

The wealth effect has been both a justification for quantitative easing and a root cause of consistent overly optimistic growth expectations by the FOMC. The research cited below suggests that the concept of a wealth effect is in fact deeply flawed. It is unfortunate that the FOMC has relied on this flawed concept to experiment with over $3 trillion in asset purchases and continues to use it as the basis for what we believe are overly optimistic growth expectations.

The effect isn’t completely absent, say the authors, but their research suggests that it may five to ten times weaker than the Fed assumes. Go figure.

Hoisington Investment Management Company (www.Hoisingtonmgt.com) is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $5 billion under management and is the sub-adviser of the Wasatch-Hoisington U.S. Treasury Fund (WHOSX).

It is been a busy day for me here in Dallas. Besides nonstop meetings and conversations and my usual reading, I had the privilege of going to the Dallas branch of the Federal Reserve and watching President Richard Fisher make loans to a group of budding entrepreneurs to build lemonade stands. It is part of a fabulous organization called Lemonade Day. The basic concept is to enable young children to learn about entrepreneurship and capitalism by helping them launch a lemonade stand. Youth who register are taught 14 lessons from their entrepreneurial workbook, with either a parent, teacher, youth organization leader, or other adult mentor supervising. At the conclusions of the lessons, they are prepared to open their first business… a lemonade stand. Local businesses and banks volunteer to empower these kids by making them a $50 loan and helping them set up their business. By the time they come to talk with the “banker,” they have a business plan and a set of goals as to what they will do with them profits they make. Watching these kids respond to adults asking them about their plans brings joy to your heart.

On May 4, in some 35 cities across the country, 200,000 young people will be building lemonade stands and trying to turn a profit. If you drive by a lemonade stand, stop and support America’s future entrepreneurs. If you are in one of those 35 cities (click here to find out), make a point to find a few lemonade stands and support America’s future. And if you don’t have a lemonade stand in your city, consider following in the footsteps of local heroes (and my good friends) Reid Walker and Robert Alpert, who decided to launch Lemonade Day here in Dallas. This should be a spring ritual in every city in the country.

Buoyed by the kids and their enthusiasm, I then went to dinner with Richard Fisher and Woody Brock and a few other associates of Ray Hunt, who hosted us for a fabulous and thought-provoking session, talking economics, geopolitics, and even a little politics. There was an interesting mix of pessimism and optimism in the room about the future of our country, but there was not a person who was not concerned with the direction in which we are headed. Gerald Turner, the president of SMU, talked to us about how fiscally conservative and socially liberal his students are. That kind of mirrors my own children. The world is changing faster, both technologically and demographically, than many of us in the Boomer generation are comfortable with. But we’d better get used to it.

It’s been a tumultuous last few days, and tomorrow morning I have to leave early for San Francisco to do a video shoot with my partners at Altegris, before going right back to the airport and flying home to speak to a local group of investment advisers and brokers brought together by Peak Capital Management. It is late and time to hit the send button, because the alarm clock will go off early. Have a great week
Your wondering where all the time goes analyst,

John Mauldin, Editor
Outside the Box

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Hoisington Investment Management – Quarterly Review and Outlook, First Quarter 2014

 

Optimism at the FOMC

 

The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States since the last recession ended in 2009. If their annual forecasts had been realized over the past four years, then at the end of 2013 the U.S. economy should have been approximately $1 trillion, or 6%, larger. The preponderance of research suggests that the FOMC has been incorrect in its presumption of the effectiveness of quantitative easing (QE) on boosting economic growth. This faulty track record calls into question their latest prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015.

A major reason for the FOMC’s overly optimistic forecast for economic growth and its incorrect view of the effectiveness of quantitative easing is the reliance on the so-called “wealth effect”, described as a change in consumer wealth which results in a change in consumer spending. In an opinion column for The Washington Post on November 5, 2010, then FOMC chairman Ben Bernanke wrote, “...higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” Former FOMC chairman Alan Greenspan in a CNBC interview on Feb. 15, 2013 said, “The stock market is the key player in the game of economic growth.” This year, in the January 20 issue of Time Magazine, the current FOMC chair, Janet Yellen said, “And part of the [economic stimulus] comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.”

FOMC leaders may feel justified in taking such a position based upon the FRB/US, a large- scale econometric model. In part of this model, employed by the FOMC in their decision making, household consumption behavior is expressed as a function of total wealth as well as other variables. The model predicts that an increase in wealth of one dollar will boost consumer spending by five to ten cents (see page 8-9 “Housing Wealth and Consumption” by Matteo Iacoviello, International Finance Discussion Papers, #1027, Board of Governors of the Federal Reserve System, August 2011). Even at the lower end of their model's range this wealth effect, if it were valid, would be a powerful factor in spurring economic growth.

After examining much of the latest scholarly research, and conducting in house research on the link between household wealth and spending, we found the wealth effect to be much weaker than the FOMC presumes. In fact, it is difficult to document any consistent impact with most of the research pointing to a spending increase of only one cent per one dollar rise in wealth at best. Some studies even indicate that the wealth effect is only an interesting theory and cannot be observed in practice.

The wealth effect has been both a justification for quantitative easing and a root cause of consistent overly optimistic growth expectations by the FOMC. The research cited below suggests that the concept of a wealth effect is in fact deeply flawed. It is unfortunate that the FOMC has relied on this flawed concept to experiment with over $3 trillion in asset purchases and continues to use it as the basis for what we believe are overly optimistic growth expectations.

Consumer Wealth and Consumer Spending

 

Many episodes of rising and falling financial and housing asset wealth have occurred throughout history. The question is whether these periods of wealth changes are associated in a consistent and reliable way with changes in consumer spending. We examined, separately, percent changes in real consumption expenditures per capita against percent changes in the real S&P 500 index (financial wealth) and against percent changes in Robert Shiller’s real home price index (housing wealth). If economic relationships are valid they should work for all time periods, regardless of highly different idiosyncratic conditions, as opposed to an isolated subset of historical experience. As such, we conducted our analysis from 1930 through 2013, the entire time period for which all variables were available.

Financial Wealth. Chart 1 is a scatter diagram of current percent changes in both real per capita personal consumption expenditures (PCE), the preferred measure of spending, and the real S&P 500 stock price index. It is made up of 84 dots, which constitutes a robust sample. Over our sample period, as with most extremely long periods, time will tend to link economic variables to each other; population is a key factor that can cause such an association. By expressing consumption in per capita terms, trending has been reduced, and in turn, an artificially overstated degree of correlation has been avoided.



If financial wealth drives consumer spending, an unambiguous positively sloped line should be evident on this scatter diagram. Larger gains in the S&P 500 would be associated with faster increases in spending; conversely, declines in the S&P 500 would be tied to lower spending. If there was a strong positive correlation, the large gains in stock prices would be associated with strong gains in spending, and they would fall in the upper right quadrant of the graph. In addition, sizeable declines in the S&P would be associated with large decreases in consumer spending, and the dots would fall in the lower left quadrant, resulting in an upward sloping line. For the relationship to be stable and dependable the dots should be packed in an around the trend line. This is clearly not the case. The trend line through the dots is positive, but the observations in the upper left quadrant of the graph and those in the lower right exhibit a negative rather than positive correlation. Furthermore, the dots are not clustered close to the trend line. The goodness of fit (coefficient of determination) of 0.27 is statistically significant; however, the slope of the line is minimally positive. This suggests that an approximate one dollar increase in wealth will boost real per capita PCE by less than one cent, far less than even the lower band of the effect in the Fed’s model.

Theoretically, lagged changes are preferred because when current or coincidental changes in economic variables are correlated the coefficients may be biased due to some other factor not covered by the empirical estimation. Also, lags give households time to adjust to their change in wealth. As such, we correlated the current percent change in real per capita PCE against current changes as well as one and two year lagged changes (expressed as a three-year moving average) in the S&P 500. The lags did not improve the goodness of fit as the coefficient of determination fell to 0.21. An increased dollar of wealth, however, still resulted in a one cent increase in consumption. We then correlated current percent change in real per capita PCE with only lagged changes in the real S&P 500 for the two prior years (expressed as a two year moving average), and the relationship completely fell apart as the goodness of fit fell to a statistically insignificant 0.06.

Housing Wealth. Chart 2 is a second scatter diagram, relating current percent changes in real home prices to current percent changes in real per capita PCE. Once again, the trend line does have a small positive slope, but there are so many observations in the upper left quadrant that the coefficient of determination does not meet robust tests for statistical significance. The dots are even more dispersed from the trend line than in the prior scatter diagram.



As with the analysis on financial wealth, when current changes in consumption were correlated against the lagged changes in home prices (both the three-year moving average and the two-year moving average), the goodness of fit deteriorated significantly and was not statistically significant in either case.

Correlations, or the lack thereof, indicated by these scatter diagrams do not prove causation. Nevertheless, economic theory offers an explanation for the poor correlation. If a person has an appreciated asset and wishes to increase spending, one option is to sell the asset, capture the gain and buy something else.

However, the funds to make the new purchase comes from the buyer of the asset. Thus, when financial assets are sold, money balances increase for the seller but fall for the buyer. The person with an appreciated asset could choose to borrow against that asset. Since new debt is current spending in lieu of future spending, the debt option may only provide a temporary boost to economic activity. To avoid an accentuated business cycle, debt must generate an income stream to repay principal and interest. Otherwise any increase in debt to convert wealth gains into consumer spending may merely add to cyclical volatility without producing any lasting benefit.

Scholarly Research

 

Scholarly research has debated the impact of financial and housing wealth on consumer spending as well. The academic research on financial wealth is relatively consistent; it has very little impact on consumption. In “Financial Wealth Effect: Evidence from Threshold Estimation” (Applied Economic Letters, 2011), Sherif Khalifa, Ousmane Seck and Elwin Tobing found “a threshold income level of almost $130,000, below which the financial wealth effect is insignificant, and above which the effect is 0.004.” This means a one dollar rise in wealth would, in time, boost consumption by less than one-half of a penny. Similarly, in “Wealth Effects Revisited 1975- 2012,” Karl E. Case, John M. Quigley and Robert J. Shiller (Cowles Foundation Discussion Paper #1884, December 2012) write, “The numerical results vary somewhat with different econometric specifications, and so any numerical conclusion must be tentative. We find at best weak evidence of a link between stock market wealth and consumption.” This team looked at quarterly observations during the 17 year period from 1982 through 1999 and the 37-year period from 1975 through the spring quarter of 2012.

The research on housing wealth is more divided. In the same paper referenced above, Karl E. Case, John M. Quigley and Robert J. Shiller write, “In contrast, we do find strong evidence that variations in housing market wealth have important effects upon consumption.” These findings differ from the findings of various other economists. In “The (Mythical?) Housing Wealth Effect” (NBER Working Paper #15075, June 2009), Charles Calomiris, Stanley D. Longhofer and William Miles write, “Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non housing consumption.”

Furthermore, R. Glenn Hubbard and Anthony Patrick O’Brien (Macroneconomics, Fourth edition, 2013, page 381) provide a highly cogent summary of the aforementioned research by Charles Calomiris, Stanley D. Longhofer and William Miles. They argue that consumers “own houses primarily so they can consume the housing services a home provides. Only consumers who intend to sell their current house and buy a smaller one – for example, ‘empty nesters’ whose children have left home – will benefit from an increase in housing prices. But taking the population as a whole, the number of empty nesters may be smaller than the number of first time home buyers plus the number of homeowners who want to buy larger houses. These two groups are hurt by rising home prices.”

Amir Sufi, Professor of Finance at the University of Chicago, also indicates that the effect of housing wealth is much smaller than assumed in the policy models and earlier empirical research. Dr. Sufi calculates that an increase of one dollar of housing wealth may yield as little as one cent of extra spending (“Will Housing Save the U.S. Economy?”, April 2013, Chicago Booth Economic Outlook event). This is in line with a 2013 study by Sherif Khalifa, Ousmane Seck and Elwin Tobing (“Housing Wealth Effect: Evidence from Threshold Estimation”, The Journal of Housing Economics). These economists found that a threshold income level of $74,046 had a wealth coefficient that rounded to one cent. Income levels between $74,046 and $501,000 had a two cent coefficient, and incomes above $501,000 had a statistically insignificant coefficient.

In total, the majority of the research is seemingly unequivocal in its conclusion. The wealth effect (financial and housing) is barely operative. As such, it is interesting to note its actual impact in 2013.

Where Was the Wealth Effect in 2013?

 

If the wealth effect was as powerful as the FOMC believes, consumer spending should have turned in a stellar performance last year. In 2013 equities and housing posted strong gains. On a yearly average basis, the real S&P 500 stock market index increase was 17.7%, and the real Case Shiller Home Price Index increase was 9.1%. The combined gain of these wealth proxies was 26.8%, the eighth largest in the 84 years of data. The real per capital PCE gain of just 1.2% ranked 58th of 84. The difference between the two was the fifth largest in the 84 cases. Such a huge discrepancy in relative performance in 2013, occurring as it did in the fourth year of an economic expansion, raises serious doubts about the efficacy of the wealth effect (Chart 3).



In econometrics, theoretical propositions must be empirically verifiable. Researchers using numerous statistical procedures examining various sample periods should be able to identify at least some consistent patterns. This is not the case with the wealth effect. Regardless if examining a simple scatter diagram or something far more sophisticated, the wealth effect is weak and inconsistent. The powerful wealth coefficients imbedded in the FRB/US model have not been supported by independent research. To quote Chris Low, Chief Economist of FTN (FTN Financial, Economic Weekly, March 21, 2014), “There may not be a wealth effect at all. If there is a wealth effect, it is very difficult to pin down ...” Since the FOMC began quantitative easing in 2009, its balance sheet has increased more than $3 trillion. This increase may have boosted wealth, but the U.S. economy received no meaningful benefit. Furthermore, the FOMC has no idea what the ultimate outcome of such an increase will be or what a return to a ‘normal’ balance sheet might entail. Given all of this, we do not see any evidence for economic growth as robust at the FOMC predicts.
Without a wealth effect, the stock market is not the “key player” in the economy, and no “virtuous circle” runs through the stock market. We reiterate our view that nominal GDP will rise just 3% this year, down from 3.4% in 2013. M2 growth in the latest twelve months was 5.8%, but velocity should decline by at least 3% and limit nominal GDP to 3% or less.

 

The Flatter Yield Curve: An Opportunity for Treasury Bond Investors

 

The Fed has indicated that the federal funds rate could begin to rise in the next couple of years, and the Treasury market has moderately anticipated this event. Similar to the 2004-2005 federal funds rate cycle, long before the federal funds rate increased short Treasury rates began their ascent (Chart 4). Interestingly, once the federal funds rate did begin to rise in 2004, long Treasury rates fell over the next two years. From May of 2004 until Feb. 2006 the federal funds rate increased by 350 basis point (bps) and the five-year note increased by 80 bps, yet the 30-year bond fell by 84 bps as inflation expectations fell. If the Fed follows through with its forecast and short rates rise, the dampening effect on inflation expectations should again cause long rates to fall. On the other hand, should economic activity continue to moderate then the downward pressure on inflation will continue. The prospect for lower Treasury yields appears favorable.

Van R. Hoisington
Lacy H. Hunt, Ph.D.

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The article Outside the Box: Hoisington Investment Management Quarterly Review and Outlook, First Quarter 2014 was originally published at Mauldin Economics

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Weekly Futures Recap With Mike Seery - SP 500, Gold, Coffee, Sugar

We’ve asked our trading partner Michael Seery to give our readers a weekly recap of the Futures market. He has been Senior Analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

SP 500 Futures
The S&P 500 in the March contract hit another all time record high trading higher by 2 points at 1855 rallying about 16 points in the last 2 trading days as investors are extremely bullish this market due to the fact of low interest rates and a weakening U.S dollar pushing commodity prices higher which also helped push up stock prices. The S&P 500 is trading above its 20 & 100 day moving average telling you that the trend is to the upside as this bull market continues in my opinion as Friday’s remain the most bullish day of the week in equities as investors continue to think that higher prices are ahead with the next major target at 1900 in the next possible couple of months as mergers and acquisitions are taking place with solid earnings across the board and nowhere else to go due to the fact of extremely low interest rates so look to continue to buy the S&P 500 in my opinion especially on dips.

Trend: Higher
Chart Structure: Solid

Gold Futures
Gold futures are trading above their 20 and 100 day moving average basically settling unchanged for the trading week going out this Friday afternoon in New York down about $8 at 1,323 after prices hit 1,345 in Wednesday’s trade as the trend still continues to the upside. I think this is just a possible pause as prices have had a heckuva rally in the last 2 months and I have been recommending a long position in gold for quite some time while placing my stop below the 10 day low which currently stands around 1,315 which is only $8 away so that stop is very tight with a high probability of getting clipped at that price on Monday, however continue to focus on gold and silver to the upside and if you’re lucky enough to get some panic selling I would still be looking at buying as 2013 created the low in gold prices in my opinion.

Trend: Higher
Chart Structure: Excellent

Coffee Futures
This is an actual email that I received from a major coffee producer in Brazil that was sent to me late Thursday night..... “I have been following your comments and suggestions on barchart´s page and have found quite accurate. I live in Machado, state of Minas Gerais, the largest Arabica producing area in Brazil and the lack of rain mixed with unusual hot temperatures are quite scary. However, the worse is yet to come. Even if it the amount of rain gets back to normality by March and April, coffee trees are no longer capable to produce enough energy for the flowering season that must happen between October and November. Having said that, 2015´s crop could be a total disaster if on top of that frost decides to show up by late May".

Coffee could face some corrections but price has no other place to go but up as Brazil alone is consuming around 25 million bags per year. If we´re down to 50 million bags this year ( I like to be optimistic) that will be quite interesting to watch. I continue to recommend a long position either with a futures contract or some type of bull call option spread for the month of July as 2.00 a pound is the next level of resistance as prices closed right as new contract highs at 180.30 a pound in the May contract.

Trend: Higher
Chart Structure: Improving

Sugar Futures
Sugar futures finished lower this Friday afternoon closing around 17.66 a pound in the May contract but rallied about 65 points for the week all due to the drought worsening in central Brazil which is cutting crop estimates which is pushing prices right near 3 ½ month highs. Sugar futures have rallied from 15.00 a pound in late January to all the way above 18.00 in yesterday’s trade as this market remains bullish and I have been recommending a long position when the breakout occurred at 16.58 I would place my stop loss at the 10 day low of 16.00 if you are long. Sugar futures are trading above their 20 and 100 day moving average; however the chart structure is very poor as volatility has entered in the last couple of weeks having wild trading sessions of 80 points or more so make sure you have a proper money management technique in place limiting your risk in case you are wrong but I do believe prices are headed higher.

Trend: Higher
Chart Structure: Poor

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Gold Stocks Are About to Create a Whole New Class of Millionaires

By Jeff Clark, Senior Precious Metals Analyst

Bear markets always end. Has this one?


Evidence is mounting that the bottom for gold may be in. While there's still risk, there's a new air of bullishness in the industry, something we haven't seen in over two years.

An ever growing number of industry insiders and investment analysts believe the downturn has come to a close. If that's true, it has immediate and critical implications for investors.

Doug Casey told me last week: "In my lifetime, the best time to have bought gold was 1971, at $35; it ran to over $800 by 1980. In 2001, gold was $250: in real terms even cheaper than in 1971. It ran to over $1,900 in 2011.

"It's now at $1,250. Not as cheap, in real terms, as in 1971 or 2001, but the world's financial and economic state is far more shaky.

"Gold is, once again, not just a prudent holding, but an excellent, high-potential, low-risk speculation. And gold stocks are about to create a whole new class of millionaires."

Just a couple of months ago, you would have had a hard time finding even one analyst saying something positive about gold and gold stocks—even some of the most bullish investment pros had gone silent.

But that's changing. Case in point: When Chief Metals & Mining Strategist Louis James and I attended last week's Resource Investment Conference in Vancouver, we witnessed quite a few very optimistic speakers.

Take Frank Giustra, for example, a self-made billionaire and philanthropist who made his fortune both in the mining sector and the entertainment industry. He's the founder of Lionsgate Entertainment, which is responsible for blockbuster movies like The Hunger Games, but he was just as heavily involved with mining blockbusters such as Iamgold, Wheaton River Minerals, Silver Wheaton, and others.

More Upturn Advocates Here's a quick scan of the growing number of voices that think the decline is over, some of which are outright bullish: "The worst is over with gold. It's time to call your broker." —Frank Holmes, US Global Investors "Sentiment is as black as night on gold, so I’m actually long on some gold miners." —Jeffrey Gundlach, bond guru and DoubleLine Capital founder "We'll see a gradual recovering throughout the year, because all the negative factors are already in the price." —Eugen Weinberg, head of commodities research at Commerzbank "Looking ahead, the downside risks seem to be diminishing, and overall we feel that the big shocks we've seen over the last two or three years are done..." —Marc Elliott, Investec "The mainstream narrative on gold is changing, indicating a possible bottom." —Bron Suchecki, Perth Mint "Orthodox investments are working on a cyclical peak, as precious metals are working on a cyclical bottom. The big pattern could be fully reversed by February-March, with gold becoming one of the best-performing sectors through the rest of 2014. The advice is to seriously reduce exposure in stocks and bonds and get fully invested in the precious metals sector. This should be completed in the first quarter." —Bob Hoye, Institutional Advisors

"I'm telling you, you've seen the bottom of the gold market," he told the rapt audience at the conference, offering a bet to the Goldman Sachs analyst who claimed gold is going to $1,000.

The stakes: Whoever loses has to stand on a popular street in downtown Vancouver dressed in women's underwear.

Tom McClellan, editor of the McClellan Market Report, stated in a recent interview on CNBC: "The commercial traders are at their most bullish stance since the 2001 low, and they usually get proven right. It's a hugely bullish condition for gold, and I'm expecting a really large rebound.

"The moment we see a major gold producer announce that it's curtailing production or it's going out of business," McClellan continued, "that'll be the moment we mark the low in gold. I expect to have one of those announcements any minute. We're getting down to the production price of gold right now, and they won't continue producing gold at that level for very long."

Are they just guessing? To answer that, first consider the historical context of this bear market—it's getting very long in the tooth:

• The current correction in gold stocks is the fourth longest since 1879. The decline of 66% ranks in the top 10 of recorded history.

• In silver, only two corrections have lasted longer—the ones that ended in 1936 and 1983.

Some technical analysts have pointed to positive chart formations, most notably the powerful "double bottom" that can portend a strong upward move. Based on intraday prices…

• Gold formed a double bottom last year, hitting $1,180.64 on June 28 and $1,182.60 on December 31, a convincing six-month span.

• Silver formed a higher low: $18.20 on June 28 vs. $18.72 on December 31, a bullish development.

• Gold stocks (XAU) formed a slightly lower low: $82.29 on June 26 vs. $79.73 December 19, 2103, a difference of 3.2%. However, as our friend Dominick Graziano, who successfully helped us earn doubles on three GLD puts last year, recently pointed out…

• The TSX Venture Index, where most junior mining stocks trade, has stayed above its June low. In fact, it recently soared above both the 50 day and 40 week moving averages for the first time since 2011.

Meanwhile, Goldcorp (GG) sent a huge bullish signal to the market earlier this month. It decided to pounce on the opportunities available right now, launching a takeover bid of Osisko Mining for $2.6 billion. The company wouldn't be buying now if it thought gold was headed to $1,000.

As Dennis Gartman, editor and publisher of The Gartman Letter, says, "It's time to be quietly bullish."

The smart money, like resource billionaire Rick Rule, is not just quietly bullish, though—they are actively buying top-quality junior mining stocks at bargain-basement prices to make a killing when prices rise.
To make sure that you can invest right alongside them, we decided to host a sequel to our 2013 Downturn Millionaires event, titled Upturn Millionaires—How to Play the Turning Tides in the Precious Metals Market.

Back then, we made a strong case for this once-in-a-generation opportunity—but it was still undetermined when the bottom would be in. It looks like that time is now very near, and we believe it's time to act.

On Wednesday, February 5, at 2 p.m. EST, resource legends Frank Giustra, Doug Casey, Rick Rule, and Ross Beaty, investment gurus John Mauldin and Porter Stansberry, and Casey Research resource experts Louis James and Marin Katusa will present the evidence and discuss the possibilities for life changing gains for investors with the cash and courage to grab this bull by the horns.

How do we know the absolute bottom is in? I'll answer that with a quote from a recent Mineweb interview with mining giant Rob McEwen, former chairman and CEO of Goldcorp:

"I'd say we're either at or extremely close to the bottom, and as an investor I'm not prepared to wait to see if the bottom's there because it's very hard to pick it. Because … if you're not taking advantage of it right now, you're going to miss a big part of the move. And when you look at the distance these stocks have to travel to get to their old highs, there's some wonderful numbers in terms of performance that I think we're going to see."

Granted, these voices are still in the minority—but that's what makes this opportunity wonderfully contrarian.

After all, once "Buy gold stocks" is investor consensus, we'll be approaching the time to sell.
Our Upturn Millionaires experts believe that our patience is about to be rewarded. And when that happens, gold stocks will be easy doubles—and the best juniors potential ten baggers.

Don't miss the free Upturn Millionaires video event—register here to save your seat. 

Even if you don't have time to watch the premiere, register anyway to receive a video recording of the event.)

Two Gold Stocks You’ll Wish You Owned in 2013… and Should Still Buy Now

By Laurynas Vegys, Research Analyst

Looking back on 2013, we have to conclude that it was one of the worst years for precious metals stocks in recent memory—despite all the reasons why it should have been a great one.


Here's a sober look at the performance of the most widely followed indices in the precious metals (PM) sector.

It's obvious that 2013 was an extremely painful year for precious metals investors.
Why? Here's a shortlist of some of the most notable reasons.

• We didn't see significant levels of price inflation in the US—the very thing that gold is a good hedge for—so there was no major flow into precious metals in America.

• Precious metals ETFs, like GLD, flooded the market with a massive amount of gold liquidations.

• The European sovereign debt crisis eased up (unless, of course, you live in the PIIGS countries, Cyprus, or pretty much anywhere else in the Eurozone).

• Rumors of the Fed tapering QE continued throughout the year, depressing the gold market and causing extreme volatility. (Oddly enough, the actual taper in December did much less harm than the rumors that preceded it, suggesting it was already priced in when it arrived.)

You can probably think of other reasons, but these no doubt contributed to the industry's precipitous decline.
In such a depressed environment, it's not surprising that almost all gold stocks were down, though our International Speculator portfolio outperformed the market indices. And in fact, two of our portfolio companies—both 2013 recommendations—saw their share prices rise substantially.

Here's how these two stocks performed last year relative to gold and the indices:

The good news is both of these stocks are still "Buys" today, and we're convinced there's much more joy to come…

2014 Winner #1: Profit at Just About Any Price

Never mind simply beating the indices; this company gained a whopping 47.9% last year, due to its unique business model of processing third party gold ore at its plant in South America.

We'd previously been skeptical of this model because ore suppliers are typically small scale and operate with no mine plan. This often causes irregularities in the quantity and quality of the ore received by the mill, which can lead to output and earnings seesawing wildly.

A very compelling angle to this story emerged, however, when the jurisdiction where the company operates decided to crack down on illegal and environmentally unsound ore processing practices. This instantly created a bottleneck, allowing the company to pick and choose its potential suppliers and accept only the highest grade deals.

Our 2014 Winner #1 has been steadily increasing output while keeping tight control over its ore grade and gross margin. One of the most attractive characteristics of its model: The company has been able to lock in a margin that remains stable even when the gold price fluctuates.

On the exploration side, our pick recently delivered high grade drill results at its South American gold project, including some bonanza grade hits. A large, high-grade discovery here could easily drive this stock to become a 10 bagger (i.e., produce gains of 1,000% or more).

However, successful exploration is not required for the shares to continue rising in the coming years, as the company will continue to profit from its gold processing operation.

This gold processor is still one of our favorite International Speculator picks. It will continue to earn record profits this year, even if the gold price goes nowhere—in other words, this stock still has plenty of upside with almost no downside risk.

2014 Winner #2: High-Grade Metal with Proven People

 

Our second favorite pick in 2013 was a new high-grade copper-gold producer in Colombia.

We had been following the story for a while, primarily because we know and trust management (and if you've read Doug Casey for any length of time, you know that "People" is the first and foremost of his Eight Ps of Resource Stock Evaluation).

We didn't recommend the stock the first time we were on site, as metals prices were falling and the company had a big property payment coming due. Flash forward to today: The company raised the money it needed, the resources in the ground have been expanding and at excellent grade, mine upgrades are under way, and the keys to the plant have just been handed over.

The dual copper-gold production is a real boon in our current, low-price environment: Even if gold were to stay down for the rest of the year, the cash flow from the copper (a base metal and, therefore, subject to different economic factors than the precious metals) should keep the company's profits humming along.
We have yet to see financial results from the operation, but we have a great deal of confidence in this mine-building team, one that has delivered for us repeatedly in the past.

Cash flow, and soon thereafter net profits, are an imminent push in this story—though the real jackpot potential comes from the large land package surrounding the company's mine, which holds multiple outcrops of high-grade mineralization that have never been drilled.

Currently, the company is busy expanding its mine, so that exploration work probably won't happen until later this year. But we do think there's a good possibility of some very big news in the second half of 2014—so you'll want to position yourself now, while prices remain relatively low.

Why You Should Own These Stocks This Year

 

Both of the companies—and their share prices—are poised to benefit greatly from increased cash flow, a ramp-up in production, and high-grade drill results.

In addition, 2014 Winner #1, with its ingenious long  term growth model and its ability to profit at just about any gold price, offers minimal downside risk. This company found a creative and profitable way to not only survive last year's downturn but to thrive in the midst of it—and with an effective model in place, it will continue to prosper this year. The tide doesn't need to turn in the precious metals sector for this stock to continue to do well.

Out of fairness to paying subscribers, we can't give you the names of these two companies. But you can find out all about them—plus how to invest and what to expect this year—without any risk to you whatsoever.
Here's what I suggest: Take us up on our 100% satisfaction guarantee and try Casey International Speculator for 3 months. If it's not everything you expected and more, simply cancel for a prompt, courteous refund of every penny you paid.

Even if you decide to cancel ANY TIME after the 3 months are up, you'll still get a prorated refund on the remainder of your subscription. That's our iron clad guarantee, so what do you have to lose? Just click here to get started.


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Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading

The fundamental backdrop behind the ramp higher in equity prices in 2013 is far from inspiring. However, fundamentals do not matter when the Federal Reserve is flooding U.S. financial markets with an ocean of freshly printed fiat dollars.

As we approach the holiday season, retail stores are usually in a position of strength. However, this year holiday sales are expected to be lower than the previous year based on analysts commentary and surveys that have been completed. This holiday season analysts are not expecting strong sales growth. However, in light of all of this U.S. stocks continue to move higher.

Earnings growth, sales growth, or strong management are irrelevant in determining price action in today’s stock market. In fact, the entire business cycle has been replaced with the quantitative easing and a Federal Reserve that is inflating two massive bubbles simultaneously.

Through artificially low interest rates largely resulting from bond buying, the Federal Reserve has created a bubble in Treasury bonds. In addition to the Treasury bubble, we are seeing wild price action in equity markets as hot money flows seek a higher return. Usually fundamentals such as earnings, earnings estimates, and profitability drive stock prices.

However, as can be here the U.S. stock market is being driven by something totally different......Read "Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading"



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How Russia Is Creating the Contrarian Play of the Decade....Tuesdays can't miss webinar

Years from now analysts will look back at the end of 2013 as the beginning of a historic bull market. They’ll see that the harbinger of this run up was in plain view for anyone who bothered to look.

I’m talking about uranium, and the harbinger I’m referring to is the historic Megatons to Megawatts agreement between the U.S. and Russia. This agreement expires in December 2013. Its ending concludes an era of cheap nuclear fuel for America and opens the door for Russia to sell its uranium on the world market to the highest bidder.

This is creating a profit opportunity of such magnitude that Casey Research has called together a world class faculty of energy experts for an urgent discussion:

·   Spencer Abraham, former U.S. secretary of energy

·    Herb Dhaliwal, former Canadian minister of natural resources

·   Lady Barbara Judge, chairman emeritus of the UK Atomic Energy Authority

·   Amir Adnani, CEO, president and director of Uranium Energy Corp.

These experts, along with legendary natural resource speculator Rick Rule, will sit down with Casey Research's chief energy investment strategist Marin Katusa to discuss the nuclear power industry and offer their insights into what's shaping up to be the kind of speculative opportunity contrarians live for.

The event is free and premieres online Tuesday, May 21 at 2 p.m. – click here to save your seat.

See you there!




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Recent Action in Silver ETFs Is Bad News for Precious Metals Bears

From Author Jeff Clark, Senior Precious Metals Analyst.....

Two weeks ago we looked at the difference between gold ETF outflows vs. physical gold purchases, and showed that most sales were coming from the former while aggressive buying was coming from the latter.


This week we examined the same data for silver – and discovered a rather striking trend. Not only are silver ETFs seeing no net outflows, their holdings are increasing. Bearish investors who treat the two precious metals as being the same, interchangeable thing, and sell silver along with gold are at risk of missing the boat.

Here's how holdings in SLV, the world's largest silver ETF, compare to those of GLD…

The divergence between gold and silver funds is clearly evident. As of March 28, SLV holdings stand at 344,128,478 ounces, up 5% so far this year and just 7% below 2011's record high.

It's not just SLV. As a group, silver exchange-traded products (ETPs) have seen their holdings rise for four consecutive months.

Why the stark divergence between the two precious-metals funds?

As most readers know, silver has a dual nature, serving as both a precious metal and an industrial metal. As a precious metal, it's a store of value like gold – but since roughly half of its use is devoted to various industrial applications, its performance has a strong correlation to economic growth. And since most mainstream analysts are bullish on the global economy, the current surge in silver ETFs is likely a result of this optimism. After all, if you see economic recovery ahead, industrial demand for the metal will grow and the price would be expected to rise.

Further, these massive inflows are occurring at a time when the silver price is mostly flat, whereas the previous peak in holdings took place when the price was soaring (spring 2011). Here's a picture of SLV holdings since January 2012, along with the silver price.

What's interesting is that the increase in SLV holdings has not had a significant impact on silver's price – yet. Since the price usually receives a boost when industries start buying more of it, many of these "paper" buyers are likely adding silver in anticipation of economic recovery, the very reason others are selling gold.

Let's take a look at physical demand.

As with gold, buyers of physical silver tend to have a long-term investment horizon and buy mostly from a currency standpoint. With prices near the bottom of their 22-month range, many investors continue to see opportunity: January sales of American Eagle silver bullion coins spiked to an all-time record of 7.5 Moz, and February's demand was 3.4 Moz, up 126% from last February's sales of 1.5 Moz. Cumulative silver coin demand for the first two months of this year already hit 10.87 Moz, a full third of total coin sales in 2012.

You can see that silver is being sought by both paper and physical buyers.

Whether it's mainstream investors buying in anticipation of economic recovery or physical buyers loading up due to currency concerns, investors collectively see big potential for silver.

Investor Implications: Is Silver a No-Lose Proposition?

 

It's a simplistic conclusion but not necessarily inaccurate: silver rises if the economy improves and industrial demand grows – or it rises if the world's major currencies continue to be debased, regardless of whether the economy is on the mend. Two different reasons, the same investment solution.

What if we get both outcomes: a robust economy and high inflation? That, of course, would be music to the ears of silver owners... the demand from industry strains supply, while bullion owners refuse to sell. Prices would go ballistic.

Does this mean silver is a no-lose proposition? Of course not. No investment comes without risk. An outright depression would be destructive to industrial demand. Roughly two-thirds of silver is used in industry and jewelry, so Doug Casey's Greater Depression could severely impact the biggest portions of current demand. The same events would increase monetary demand for silver, but the two trends may not have equal weight on the price of silver at the same time. We thus wouldn't make silver our sole investment, but we see a lot of upside in the metal under current market conditions.

At the end of the day, we're more inclined to buy silver for the same reasons we buy gold. While a case can be made for an improving economy, there's an overwhelming one already built for government money-printing to result in a massive loss of purchasing power, and that argues for seeking the safe haven of precious metals – both of them.

Don't miss this opportunity: Prices are low right now, and that makes it time to buy.

It's an even better time to buy gold and silver producers – especially select junior mining companies. Right now, the sector is so badly beaten down that even the best-of-the-best outfits are selling at discounts of 50% or more, giving you a rare opportunity to get in at the bottom of what could be the next great investment bubble.

To help you more fully appreciate the magnitude of this opportunity – and to give you concrete investment strategies – some of the world's top natural-resource speculators and economic minds will appear in a special, online video event on April 8, titled Downturn Millionaires. They include: contrarian investment legend Doug Casey; Agora Inc. publisher Bill Bonner; Sprott US Holdings Chairman Rick Rule; Mauldin Economics Chairman John Mauldin; and Casey Research Chief Metals and Mining Investment Strategist Louis James.

The event is free and is a must-see for serious investors. Get more information and register today.


The 2 Energy Sectors You Should Invest in This Year
 

Chevron Announces Webcast on 1st Quarter Earnings

Chevron’s discussion of first quarter 2012 earnings with security analysts will take place on Friday, April 27, 2012, at 8:00 a.m. PST. A webcast of the meeting will be available in a listen only mode to individual investors, media, and other interested parties on Chevron’s website at www.chevron.com under the “Investors” section.

Additional financial and operating information will be contained in the Earnings Supplement that will be available under “Events & Presentations” in the “Investors” section on the website.

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Peter Beutel, Energy Analyst and Editor at Daily Energy Hedger Dies at 56

Peter Beutel, an analyst and editor of the Daily Energy Hedger newsletter, who often appeared on CNBC, Bloomberg Television and Fox News, has died. He was 56.

Beutel died yesterday of a heart attack at his home in New Canaan, Connecticut, his mother, Gail Beutel, said. His father, Bill Beutel, was the anchorman for New York’s WABC-TV for more than 30 years and died in 2006.

Peter Beutel, founder and president of Cameronhanover.com, an energy advisory company, died in New Canaan, Connecticut. He was 56.

He was president of Cameron Hanover, an energy research and risk management company he founded in 1994. Based in New Canaan, it provides fundamental and technical analysis of crude oil, natural gas and other energy markets, and published the Daily Energy Hedger.

In his 2005 book, “Surviving Energy Prices,” Beutel recounts the history of oil trading since about 1850, when people relied on coal for heat and whale oil for light. Crude “was an alternative source of energy, like wind power and solar energy are today,” he wrote.

“In the last 20 years, rampant price fluctuations have forced everyone buying, selling or using oil to reconsider the way they do business,” Beutel wrote. “The world keeps changing, and there’s nothing new in that.”

Peter C. Beutel was born on July 22, 1955. His father, in addition to anchoring news at WABC, was the first host of “AM America,” which eventually became ABC’s nationally televised “Good Morning America” program.

From E.F. Hutton......
The younger Beutel graduated from Dartmouth College in Hanover, New Hampshire, in 1977, 24 years after his father had done so.

Peter Beutel began working on Wall Street at E.F. Hutton in 1979, according to Cameron Hanover’s website. His career took him to Gill & Duffus, Donaldson, Lufkin & Jenrette and Merrill Lynch & Co., where he worked prior to starting Cameron Hanover.

“Peter was a great friend and business partner,” said Vince Lanci, managing partner and a partner with Beutel at FMX Connect LLC, a Stamford, Connecticut based commodity information provider. “He was an oil analyst for more than 30 years, going back to the days of E.F. Hutton. He will be sorely missed.”

Posted courtesy of Bloomberg News

Transocean Drops on Biggest Earnings Miss in Half a Decade

Transocean Ltd. (RIG), the world’s largest offshore oil driller, fell the most in almost three years after third quarter earnings missed analysts’ estimates by the biggest margin in at least half a decade.

Transocean declined 12 percent to close at $49 in New York. Earlier, the stock plunged as much as 14 percent for the worst intraday performance since November 2008. After regular trading on U.S. markets closed yesterday, the company posted a loss of $71 million, or 22 cents a share, its largest third quarter loss in at least 10 years.

Excluding one time items such as foreign exchange contract costs associated with last month’s Aker Drilling ASA acquisition, the Vernier, Switzerland based company recorded per share profit of 3 cents, 73 cents lower than the average of 32 analysts’ estimates compiled by Bloomberg.

The company “did not deliver” in the third quarter, Chief Executive Officer Steven Newman told analysts and investors on a conference call today.

Manufacturing delays among equipment providers prolonged downtime for rigs subject to more stringent U.S. safety rules imposed in the wake of last year’s Macondo disaster in the Gulf of Mexico, Newman said........Read the entire Bloomberg article.



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How Many Times Have we Seen This Movie.....Goldman Sachs says Oil Going Much Higher!

Analysts from Goldman Sachs are declaring that oil prices will likely increase in the near to intermediate term. Price action so far on Tuesday has just about totally negated the nasty red candle from Monday. Oil continues to consolidate near the lows and will eventually either breakdown to new lows and possibly test the 200 period moving average or we will see an extension higher to the $103 – $105 / barrel price level. The daily chart of oil futures is shown below:

In the longer term, we remain extremely bullish on energy as the fundamentals indicate that oil demand will likely continue to rise while supply levels remain flat or begin to increase. Oil prices are likely to go much higher than what most analysts are expecting. For now, I’m going to be watching the key support level illustrated above. If oil prices continue to consolidate at these levels a breakout is nearly inevitable. The question remains which way will oil break?



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Commodity Corner: Crude Oil Settles Flat after 25 Month High

Crude futures remained flat Thursday, pulling back from a 25 month high as data showed record oil demand in China. Light, sweet crude settled unchanged at $87.81 a barrel on the New York Mercantile Exchange. The futures price peaked at $88.63, the highest intraday price since Oct. 9, 2008, and bottomed out at $87.54. Industrial production in China grew by 13.1 percent in Oct. compared to the same period in 2009, increasing oil usage to 8.92 million barrels per day (bpd). According to the National Statistical Bureau, China's refineries hit record throughput at 8.27 million bpd. The 12.2-percent increase from Oct. 2009 to Oct. 2010 is a key bellwether of crude demand growth.

The Organization of Petroleum Exporting Countries (OPEC) also provided support for oil prices by raising its oil consumption forecast for 2010 and 2011. It increased its expectations from global oil demand to 1.17 million bpd from 120,000 for 2011. Analysts said trading volume was light Thursday due to Veteran's Day, a holiday for many in the U.S. Henry Hub natural gas, meanwhile, fell 12 cents to $3.93 per thousand cubic feet.

The Energy Information Administration (EIA) Thursday reported an increase of 20 million cubic feet of natural gas in U.S. stockpiles for the week ended Nov. 5. Total gas in storage has reached a record of 3.84 trillion cubic feet, 31 barrel cubic feet higher than the previous year. Analysts claim that due to milder weather, the demand for heating is not as high. Natural gas fluctuated between $3.92 and $4.13 Thursday. Meanwhile, gasoline futures for December delivery slipped by less than a penny Thursday to settle at $2.24 a gallon. Gasoline peaked at $2.25 and bottomed out at $2.23.

Courtesy of Rigzone.Com


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Crude Oil Bulls Charge Ahead on Surprise Draw

Lifted by a bullish drop in U.S. crude inventories, as well as upbeat economic data on the domestic front, crude futures snapped a recent losing streak on the New York Mercantile Exchange Wednesday to soar past an $85 resistance area. On target to test $90 in the near term, the price of light, sweet crude oil for May delivery added $1.79 to yesterday's final price tag to close higher at $85.84 a barrel. Also rising on today's commodity exchange, NYMEX gasoline futures scaled above $2.32 a gallon, while natural gas spot prices at the Henry Hub burned brighter at $4.20 Mcf.

Rally Reignites
"I think we're seeing the rally that drove oil prices to 18 month highs starting up again," commented Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. The analyst underscored several supportive factors helping to prop up the price per barrel of crude today, including weakness in the dollar, encouraging retail sales for March and positive earnings reports out of U.S. companies. "The stronger earnings reports can point to improving economic conditions, which have played a primary role in rallying oil prices," McGillian explained.

Furthermore, the Energy Information Administration posted surprisingly supportive technical data for the previous week, which renewed risk appetite for the energy commodity and pushed prices back into positive territory. Specifically, crude oil supplies, expected to have grown by 1.4-1.5 million barrels, fell by 2.2 million barrels in the week to Apr. 9. Also paring down bearish levels, gasoline stocks shed 1.1 million barrels last week, trumping forecasts for a mere 600,000 barrel loss.

From reporter Nancy Agin at Rigzone


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Crude Oil Is Little Changed as GDP Report, Dollar's Weakening Send Mixed Signals

Crude oil fluctuated after a government report that the U.S. economy in the fourth quarter of 2009 rose less than analysts forecast and the dollar weakened, increasing the investment appeal of commodities. Oil traded within a range of $1.87 a barrel as the Commerce Department reported gross domestic product expanded at a 5.6 percent annual rate, less than the median estimate of 5.9 percent by analysts in a Bloomberg News survey. The dollar dropped as much as 1.1 percent against the euro.

“Since the GDP number came out, the market has struggled a bit” because it didn’t meet the consensus, said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. Crude oil for May delivery dropped 14 cents to $80.39 a barrel at 10:26 a.m. on the New York Mercantile Exchange. Futures have increased 48 percent from a year earlier. Oil declined 0.7 percent this week.

The dollar fell for the first time in four days versus the euro after European Central Bank President Jean-Claude Trichet toned down his opposition to the International Monetary Fund’s involvement in a Greek rescue plan. The U.S. currency dropped 1 percent to $1.3407 from a 10 month high of $1.3273 yesterday.

“People are watching the dollar as they await clear direction from inventory numbers,” Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. Brent crude oil for May settlement rose 14 cents to $79.75 a barrel on the London based ICE Futures Europe exchange.....Read the entire article.


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Where is Crude Oil Headed Next Week?

CNBC's Sharon Epperson discusses the day's activity in the commodities markets, and looks ahead to where oil is likely headed next week.




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Crude Oil Rises Above $82 as U.S. Imports, Fuel Supplies Drop

Crude oil rose above $82 a barrel after the Energy Department reported U.S. imports fell to a seasonal low and fuel inventories dropped. Crude imports slipped 0.8 percent last week to the smallest level for the second week in March since 2002. Supplies of gasoline and distillate fuels, which include heating oil and diesel, decreased more than forecast by analysts in a Bloomberg News survey. OPEC ministers meeting in Vienna today left production targets unchanged to support current price levels.

“Imports are down to a really, really small trickle,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “We’re not able to bring in as much oil as we’d like to because the oil that is out there is going elsewhere. When the economy does start to grow and the refineries start to pick up runs, that crude isn’t going to be there.” Crude oil for April delivery gained $1.22, or 1.5 percent, to $82.92 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Prices have increased 69 percent in the past year. Oil traded at $82.50 a barrel before the release of the inventory report at 10:30 a.m. in Washington.

Oil imports decreased by 64,000 barrels a day last week to 8.43 million. The Organization of Petroleum Exporting Countries delivered 47 percent of its crude and refined products to the Asia Pacific region in 2008, up from 45 percent the year before, according to data on its Web site. That compares with a decline in the U.S. to 22 percent in 2008 from 26 percent in 2007.....Read the entire article.

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A Quick Peek at Crude Oil

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Traders Ditching Oil Hoarded At Sea As Market Tightens

The amount of oil held in tankers at sea has halved from its April 2009 peak of 90 million barrels according to ship broker ICAP. Given that much of this oil was held in order to arbitrage current vs. future oil prices, a reduction in floating storage implies a tightening of the oil market.

WSJ: ICAP said there were currently 21 trading VLCCs offshore with some 43 million barrels of crude. Seven of these are expected to discharge in February and one more in March. So far, it appeared those discharged cargoes wouldn't be replaced by new ones.

"I haven't seen any fixtures for VLCC storage in the last two weeks," said Simon Newman, ICAP's senior tanker analyst. "That would imply that storage looks set to fall in the short term."

Assuming there are no new fixtures, the amount of crude in storage could sink to 27 million barrels by March, the lowest level since the current contango play began in late 2008.

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Oil Rises for Second Day on Demand Outlook, Supply Constraints

Crude oil rose for a second day on speculation increasing demand and constraints on supply will reduce global stockpiles and support prices. Oil imports by China, the world’s second largest consumer, climbed 24 percent in December to reach a record annual total of 203.8 million metric tons, according to a customs report yesterday. Chevron Corp. said the Makaraba-Utonana pipeline it operates in southern Nigeria’s Delta state was breached on Jan. 8, shutting-in 20,000 barrels a day of crude.

“Asia has obviously performed well throughout this recession,” said Toby Hassall, commodity analyst at CWA Global Markets Pty in Sydney. “Beyond the short term, the global economy, and the U.S. in particular, the largest consumer of oil, is in the early stages of a recovery, which suggests that demand is on the mend.” Crude oil for February delivery rose as much as 71 cents, or 0.9 percent, to $83.46 a barrel in after hours electronic trading on the New York Mercantile Exchange. It was at $83.43 at 8:07 a.m. Singapore time.

The contract rose 9 cents to $82.75 on Jan. 8 after the dollar tumbled on a report showing employment in the U.S. unexpectedly fell in December. Futures climbed 4.3 percent last week and gained in 11 of the past 12 sessions as freezing temperatures in Europe and North America boosted heating demand.....Read the entire article.

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Crude Oil Set for Biggest Annual Gain in Decade Amid Iran Political Unrest

Crude oil was little changed, heading for its biggest annual gain in a decade, on forecasts that U.S. stockpiles are narrowing while unrest in Iran sows concerns supply will be disrupted. U.S. crude inventories likely fell by 1.85 million barrels last week, according to analysts surveyed by Bloomberg News before an Energy Department report due today at 10:30 a.m. in Washington. Iran, holder of the world’s second largest crude reserves, detained about 1,000 people after the biggest anti- government demonstrations in six months.

“Stocks are showing the market is getting towards a more balanced situation, though it will take time,” said Alexandra Kogelnig, a consultant with JBC Energy GmbH in Vienna. “Tensions in Iran are always a factor even if there is nothing immediately happening, as if something major happens it will affect exports.” Crude oil for February delivery was at $78.73 a barrel, 14 cents lower in electronic trading on the New York Mercantile Exchange, as of 12:57 p.m. London time. It earlier rose as much as 32 cents, or 0.4 percent, to $79.19 a barrel. Futures are set for a 77 percent gain this year, the biggest since 1999. Prices have tripled in the past decade.....Read the entire article.

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Tanker Glut Signals 25% Freight Decline as 26 Miles of Ships Meet Demand

A 26 mile long line of idled oil tankers, enough to blockade the English Channel, may signal a 25 percent slump in freight rates next year. The ships will unload 26 percent of the crude and oil products they are storing in six months, adding to vessel supply and pushing rates for supertankers down to an average of $30,000 a day next year, compared with $40,212 now, according to the median estimate in a Bloomberg News survey of 15 analysts, traders and shipbrokers. That’s below what Frontline Ltd., the biggest operator of the ships, says it needs to break even.

Traders booked a record number of ships for storage this year, seeking to profit from longer dated energy futures trading at a premium to contracts for immediate delivery, according to SSY Consultancy & Research Ltd., a unit of the world’s second largest shipbroker. Ships taken out of that trade would return to compete for cargoes just as deliveries from shipyards’ largest ever order book swell the global fleet.

“The tanker market has been defying gravity,” said Martin Stopford, a London based director at Clarkson Plc, the world’s largest shipbroker. Stopford has covered shipping since 1971. More than half of the ships are in European waters, with the rest spread out across Asia, the U.S. and West Africa. Lined up end to end, they would stretch for about 26 miles.....Read the entire article.

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