Kinder Morgan Announces Acquisition of Jones Act Shipping Tankers

Kinder Morgan Energy Partners, (NYSE: KMP) today announced it has entered into a definitive agreement to acquire American Petroleum Tankers (APT) and State Class Tankers (SCT) from affiliates of The Blackstone Group and Cerberus Capital Management for $962 million in cash. APT and SCT are engaged in the marine transportation of crude oil, condensate and refined products in the United States domestic trade, commonly referred to as the Jones Act trade.

APT’s fleet consists of five medium range Jones Act qualified product tankers, each with 330,000 barrels of cargo capacity. With an average vessel age of approximately four years, the APT fleet is one of the youngest in the industry. Each of APT’s vessels is operating pursuant to long term time charters with high quality counterparties, including major integrated oil companies, major refiners and the U.S. Navy. These time charters have an average remaining term of approximately four years, with renewal options to extend the initial terms by an average of two years. APT’s vessels are operated by Crowley Maritime Corporation, which was founded in 1892 and is a leading operator and technical manager in the U.S. product tanker industry.

SCT has commissioned the construction of four medium range Jones Act qualified product tankers, each with 330,000 barrels of cargo capacity. The vessels are scheduled to be delivered in 2015 and 2016 and are being constructed by General Dynamics’ NASSCO shipyard. Upon delivery, the SCT vessels will be operated pursuant to long-term time charters with a major integrated oil company. Each of the time charters has an initial term of five years, with renewal options to extend the initial term by up to three years. Kinder Morgan will invest approximately $214 million to complete the construction of the SCT vessels.

“This is a strategic and complementary extension of our existing crude oil and refined products transportation business,” said John Schlosser, president of KMP’s Terminals segment. “Product demand is growing and sources of supply continue to change, in part due to the increased shale activity. As a result, there is more demand for waterborne transportation to move these products. We are purchasing tankers that provide stable fee based cash flow through multi-year contracts with major credit worthy oil producers.”

“Blackstone and Cerberus are pleased to have founded and built American Petroleum Tankers into a market leading Jones Act tanker company,” said Sean Klimczak, Senior Managing Director at Blackstone. “We have enjoyed our partnership with APT’s management team and wish them continued success with Kinder Morgan in this next phase of APT’s growth.”

The transaction, which is subject to standard regulatory approvals, is expected to close in the first quarter of 2014, at which time it will be immediately accretive to cash available to KMP unitholders. APT currently generates about $55 million of annual EBITDA. After completion of construction of the four SCT vessels, KMP expects combined annual EBITDA of approximately $140 million, which is an EBITDA multiple of 8.4 times. The general partner of KMP, Kinder Morgan, Inc. (NYSE: KMI), has agreed to waive its incentive distribution amounts of $16 million in 2014 and $19 million in 2015 and $6 million in 2016 to facilitate the transaction.

Kinder Morgan Energy Partners, L.P. (NYSE: KMP) is a leading pipeline transportation and energy storage company and one of the largest publicly traded pipeline limited partnerships in America. It owns an interest in or operates more than 54,000 miles of pipelines and 180 terminals. The general partner of KMP is owned by Kinder Morgan, Inc. (NYSE: KMI). Kinder Morgan is the largest midstream and the fourth largest energy company in North America with a combined enterprise value of approximately $105 billion. It owns an interest in or operates more than 82,000 miles of pipelines and 180 terminals. Its pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke and steel. KMI owns the general partner interests of KMP and El Paso Pipeline Partners, L.P. (NYSE: EPB), along with limited partner interests in KMP and EPB and shares in Kinder Morgan Management, LLC (NYSE: KMR). For more information please visit www.kindermorgan.com.

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The Energy Report: Where to Drill for Portfolio Outperformance

The Energy Report: Chad, you recently released an early look at 2014 titled, Drilling Down for Outperformance. You noted that you saw an average 3540% upside on your Buy rated names. What are your criteria for picking companies?

Chad Mabry: To start, we use a discounted cash flow based net asset value (NAV) approach to valuing exploration and production (EP) stocks. While cash flow is an important metric, NAV does a better job of comparing companies with different asset profiles, specifically within the small and midcap EP space. NAV does a better job of accounting for a company's upside potential than cash flow metrics. We use a bottom-up approach to drill down into a company's asset base, its average type curve, estimated ultimate recoveries (EURs), well costs and so on. In this way we find out about the economics of those plays and what the sensitivities are to our commodity price deck. We then try to sort out companies that aren't being valued appropriately and identify strong risk reward opportunities.

TER: There has been a lot of commodity price volatility this last year. How do you determine what prices to use when you're estimating NAV?

CM: That's a good question. Given the volatility inherent in oil and gas commodity price movements, forecasting prices is somewhat of a losing proposition. We try to set a long term price deck based on the industry cost structure, which is based on the marginal cost of new production. Over the long term, laws of supply and demand will win out and commodity prices should normalize toward equilibrium levels, which are currently about $90 per barrel ($90/bbl) for oil and $4.50 per thousand cubic feet ($4.50/Mcf) for natural gas.

TER: The Energy Information Administration (EIA) is forecasting U.S. oil production to increase by about 1 million barrels/day in 2014 with year-over-year growth in the 1015% range. What impact could that have on the price of oil going forward?

CM: There is an oil production renaissance in the U.S. We expect that to continue, driven by the independent EPs. We're forecasting production growth in 2014 of about 5055% in our coverage universe. That is going to be driven by oil growth as companies continue to allocate the vast majority of their capex budgets next year to oil and liquids-weighted projects.

TER: Are there certain sectors of the oil market that you like better than others?

CM: We feel the outperformers into 2014 are the companies that have established core positions in some of the more economically attractive oil and liquids resource plays in North America. It won't come to anyone's surprise that some of the best-in-class resource plays include the Eagle Ford, the Bakken and the Niobrara, to name a few. But we also feel like there are some pretty intriguing, earlier-stage plays that offer exposure to oil and liquids that we're going to be keeping an eye on into next year, specifically the Utica, the Tuscaloosa Marine Shale and the Woodbine.

TER: What do you like about developed areas, like the Eagle Ford?

CM: Eagle Ford has become the standard bearer for the oil and liquids resource plays in the U.S. The geography is best in class and it is a repeatable play with very compelling economics. As we move into development mode in the play, we continue to see the potential for additional catalysts, which should continue to lead to outperformance for our names that have exposure there.

As well costs continue to reduce and recoveries and completion designs improve, we expect rates of return to drift higher. As various operators focus on additional zones, there is additional upside potential to companies' drilling inventories in the form of additional pay zones.

The best exposure to the Eagle Ford and one of our top picks is Carrizo Oil Gas Inc. (CRZO:NASDAQ), which has established a very nice sweet spot in La Salle County.

We also like Sanchez Energy Corp. (SN:NYSE), which has become somewhat of an Eagle Ford pure play with a very robust inventory across the play.

TER: Carrizo is in the Utica, the Marcellus and the Niobrara. In November, it announced record oil production, and the stock price is up pretty dramatically, although it's off its all-time highs. Is there still upside?

CM: We believe so. We see roughly 50% upside to our NAV from current levels. One of the reasons that it is a top pick of ours is that it has core positions in very attractive plays. You mentioned its position in the Utica, the Niobrara and the Marcellus. It has some best in class exposure to these plays.

We expect the company to have some downspacing results in the Eagle Ford as it continues to test 500 foot (500 ft) spacing versus 750 ft, where it is today. We don't have that in our numbers right now. We estimate that could add about $10/share to our NAV from current levels.

"Given the volatility inherent in oil and gas commodity price movements, forecasting prices is somewhat of a losing proposition."

In the Utica, the company's acreage is in a very delineated, core spot of the play. While it is still early on in its activity in the play, we expect it to have initial well results in the near term. We think that could be another catalyst for the name.

Then, like other operators in the Niobrara, Carrizo is also testing downspacing, which, if successful, could yield incremental upside to what we're giving it credit for right nownot only core positions in core plays, but also the catalysts that we expect to drive the stock up toward our NAV over the next 12 months.

TER: You have a Buy rating on Sanchez. It also has a secondary in the Tuscaloosa Marine Shale. What impact could the Tuscaloosa have on its share price?

CM: We have just $1/share of Tuscaloosa Marine Shale value in our NAV right now. It's very minimal at this point. At current levels, investors are getting a free option on Sanchez' Tuscaloosa Marine Shale potential, which could be very meaningful.

One of the reasons that we like these more emerging areas is that you're not really paying as much for some of these positions. Contango Oil Gas Co. (MCF:NYSE.MKT), which is more of a legacy name, also has exposure. I'd even classify it as a Tuscaloosa Marine Shale sleeper because it doesn't register on a lot of people's radars as having a significant position in that play following its merger with Crimson Exploration Inc. (CXPO:NASDAQ).

If you're a believer in the long-term commerciality of the play, which we are, then a name that you need to own is Goodrich Petroleum Corp. (GDP:NYSE), which has by far the most leverage to that play with around 300,000 net acres. As that company accelerates to a five rig-operated program in the Tuscaloosa Marine Shale next year and gets away from the well watch nature that's made for a volatile 2013, its position in that play delivers outperformance for the stock. If you're a believer in the play, then Goodrich is a must own name. As the play advances further along the development curve, Goodrich becomes a takeout candidate for any larger company looking to gain exposure in a material way.

TER: What else is intriguing in the Niobrara?

CM: A lot of these names with exposure to the Niobrara have been some of 2013's outperformers.

But when we look at who has exposure to the play and who maybe isn't getting as much credit as the next guy, an attractive name to us is PDC Energy Inc. (PDCE:NASDAQ). It's the third-largest producer and leaseholder in the Wattenberg. In addition, it has a pretty significant position in one of the emerging areas of the Utica. At these levels, it's a pretty compelling investment.

TER: The price is down from earlier in the year. Is this a buying opportunity?

CM: The stock did correct a bit after a Q3/13 earnings miss and its initial results in the southern part of its Utica position, which didn't meet Street expectations. This did present a nice buying opportunity. It does have a number of upcoming catalysts, not only in the Utica, but also from additional downspacing and testing of other formations in the Wattenberg/Niobrara. At current levels, investors are getting a free option on its position in the Utica.

TER: Are there any neighbors you like?

"As we look into 2014, we're more focused than ever on company-specific fundamentals and relative performance indicators that should help pick the outperformers into next year."

CM: Yes, as a matter of fact. Bonanza Creek Energy Inc. (BCEI:NYSE) has a very quality position in the Niobrara; it's essentially a Niobrara pure play. But at current levels, it is receiving closer to full valuation for that position, and we see better risk-reward in other names, specifically Carrizo and PDC.

TER: Bonanza Creek is both in Colorado and the Cotton Valley sands in Arkansas. What are the next steps?

CM: Its focus will be on its Wattenberg/Niobrara position. It has a four-rig program in the play, which should drive 2014 production growth of 4550%. But at the same time, the Wattenberg valuation is more than $50,000/acre, which just seems closer to full value at these levels.

TER: Did you also initiate coverage on Gulfport Energy Corp. (GPOR:NASDAQ)?

CM: Yes. We have a Hold rating on Gulfport for similar reasons. Whereas Bonanza Creek has a quality position in the Wattenberg/Niobrara, Gulfport has a fantastic position in the core of the Utica. The valuation is a bit stretched at these levels, however.

TER: You have a Buy on Midstates Petroleum Co. Inc. (MPO:NYSE). Is that based on its exposure to the Anadarko Basin?

CM: The Buy on Midstates is based on the fact that its portfolio is misunderstood and undervalued. It also has a leading position and is one of the biggest operators in the Mississippi Lime play in Northern Oklahoma. Then it has the third leg of the stool, if you willthe Wilcox play in Louisiana, which is an earlier-stage play that it is not receiving any credit for. As we move into 2014 and the company executes and delivers what we feel like will be above-average production growth, that value gap is likely to narrow.

TER: Do you still like the Gulf of Mexico?

CM: It's all about relative valuation. The Gulf of Mexico players had a nice tailwind earlier this year with Light Louisiana Sweet oil prices enjoying a healthy premium to West Texas Intermediateclose to $20-plus/bbl earlier this year. That premium has since eroded. It's not something that will likely come back in a meaningful way in the near term. As a result, you lose that benefit looking into 2014. But, like I said, it's all about relative valuation.

We do think there are some nice opportunities in the Gulf, specifically Stone Energy Corporation (SGY:NYSE). It has several impactful catalysts in the form of deepwater exploration wells that should have results starting in early 2014, which could drive outperformance for the stock. Investors aren't paying for any of that upside at these levels, so that's really why we have the Buy rating on Stone at this time.

TER: Its stock is up to $40 from $32 last month. Is that mainly because of the new spudding in early 2014?

CM: Fortunately for Stone Energy, there are a number of wells, operated and non-operated, that should provide a steady flow of catalysts throughout 2014 and 2015 in the deepwater Gulf of Mexico. We expect several catalysts over the course of the next couple of years.

TER: Are there other relative outperformers in the Gulf of Mexico?

CM: Right now, our two names that operate exclusively on the Gulf of Mexico shelf are Energy XXI (Bermuda) Ltd. (EXXI:NASDAQ) and Energy Partners, Ltd. (EPL:NYSE). We have a Buy rating on Energy XXI and a Hold rating on Energy Partners. Shares of Energy XXI, on a relative basis, are more attractive because they are trading below their proved-only valuation and the company is pursuing a number of exploration objectives, which could cause the stock to outperform. Energy Partners has had some issues in some of its core fields recently, which could provide a headwind for shares in the near term.

TER: Energy XXI also has been doing quite a bit of consolidating of other smaller players. It is pursuing some deeper salt plays. When could those start to pay off?

CM: It's the third largest oil producer on the shelf. It is taking advantage of its footprint in the area and its expertise of the geology in the basin to pursue some deeper exploration targets, not necessarily the ultra deep. We should get some results into 2014 from the company.

You mentioned it being a consolidator. Both Energy Partners and Energy XXI have become consolidators on the shelf. Looking into 2014, we wouldn't be surprised to see Energy XXI target some larger objectives internationally, specifically in Malaysia, which offers a nice analog field to what we've seen in the Gulf of Mexico, but with larger scale.

TER: Energy XXI also just initiated a share buyback program and raised the dividend. Is that part of a trend?

CM: It's a representation of its confidence in the stock and in its performance, its belief that shares are undervalued and its willingness to buy back shares at levels it feels are too low.

TER: Smart capital allocation has been a differentiator for some of these companies in 2013. How are successful companies better using their resources?

CM: Since we've seen commodity prices somewhat range-bound with a lot of the land grab more or less over, investors will be even more willing to reward companies that demonstrate effective and efficient operations in 2014.

TER: Companies have been trying to create some new catalysts and value, and derisk their new projects. Is that paying off?

CM: Yes. We've seen that across the board in terms of drilling efficiencies. As companies have migrated away from acreage capture to development mode in their core resource plays, we've seen rig productivity increase fairly dramatically. That's been an area where companies have been able to deliver meaningful cost savings while, at the same time, enhancing their drilling and completion techniques, essentially making bigger wells and increasing their IRRs in these plays. Downspacing has also been a catalyst in a lot of these plays and, looking into 2014 in some of the more developed plays, whether it's the Bakken, the Eagle Ford or the Niobrara, additional downspacing results will be a major catalyst for a number of companies.

TER: Can you leave us with some advice for investors in the space as they prepare for 2014?

CM: Stock selection will be more important than ever looking into 2014. While this is a group that historically has a high correlation to oil and gas prices, it's becoming more of a stock picker's market. As we look into 2014, we're more focused than ever on company specific fundamentals and relative performance indicators that should help pick the outperformers into next year.

TER: Thanks for joining us today.

CM: Thanks for having me.

Chad Mabry is an analyst in MLV's Energy and Natural Resources Research Department. Bringing over 10 years of experience in the oil and gas industry, he primarily focuses on small- and mid-cap companies in the Exploration Production sector. Prior to joining MLV, Mr. Mabry was a senior analyst with KLR Group and Rodman Renshaw, and an associate analyst with Pritchard Capital Partners. Mr. Mabry holds an M.A. in Accounting and a B.A. in Philosophy from the University of Texas at Austin.

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Commodity Markets Summary for Thursday December 19th

Crude oil closed higher on Thursday renewing the rally off November's low. The high range close sets the stage for a steady to higher opening when Friday's night session begins. Stochastics and the RSI are diverging but are turning neutral to bullish signaling that sideways to higher prices are possible near term. If January renews the rally off November's low, the 50% retracement level of the August-November decline crossing at 99.87 is the next upside target. Closes below the 20 day moving average crossing at 96.19 are needed to confirm that a short term top has been posted. First resistance is today's high crossing at 99.17. Second resistance is the 50% retracement level of the August-November decline crossing at 99.87. First support is the 20 day moving average crossing at 96.19. Second support is November's low crossing at 91.77.

Natural gas closed sharply higher on Thursday renewing the rally off November's low. The high range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are diverging but are turning neutral signaling that sideways to higher prices are possible near term. If January extends the rally off November's low, the 75% retracement level of this year's decline crossing at 4.487 is the next upside target. Closes below the 20 day moving average crossing at 4.104 would confirm that a short term top has been posted. First resistance is today's high crossing at 4.471. Second resistance is the 75% retracement level of this year's decline crossing at 4.487. First support is the reaction low crossing at 4.172. Second support is the 20 day moving average crossing at 4.104.

The March S&P 500 closed lower due to light profit taking on Thursday as it consolidated some of this week's rally. The high range close sets the stage for a steady to higher opening when Friday's night session begins trading. Stochastics and the RSI are bullish signaling that sideways to higher prices are possible near term. If March extends this year's rally into uncharted territory, upside targets will be hard to project. If March renews the decline off November's high, the reaction low crossing at 1738.70 is the next downside target. First resistance is today's high crossing at 1806.10. Second resistance is unknown. First support is Monday's low crossing at 1755.00. Second support is the reaction low crossing at 1738.70.

Gold closed lower on Thursday renewing the decline off August's high. The low range close sets the stage for a steady to lower opening when Friday's night session begins trading. Stochastics and the RSI are diverging but bearish signaling that sideways to lower prices are possible near term. If February renews the decline off August high, June's low crossing at 1187.90 is the next downside target. Closes above last Tuesday's high crossing at 1267.50 are needed to confirm that a low has been posted. First resistance is last Tuesday's high crossing at 1267.50. Second resistance is the reaction high crossing at 1294.70. First support is today's low crossing at 1190.00. Second support is June's low crossing at 1187.90.

COT Fund fav coffee closed lower on Thursday as it consolidates some of the rally off November's low. The low range close set the stage for a steady to lower opening on Friday. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. If March extends this month's rally, the reaction high crossing at 12.10 is the next upside target. Closes below the 20 day moving average crossing at 11.04 would confirm that a short term top has been posted.

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Cabot Oil & Gas raises 2013 production growth guidance view to 50%-55%

Cabot Oil & Gas (COG) says it recently achieved a new gross production record in the Marcellus shale of 1.5B cf/day, prompting it to raise its 2013 production growth guidance range to 50%-55% from 44%-54%; 2014 production growth guidance remains unchanged at 30%-50%.

COG also agrees to provide 350M btu/day of natural gas to the Dominion Cove Point LNG Terminal for 20 years commencing on the project's in-service date scheduled for 2017.

Here's a FREE Trend Analysis for Cabot Oil & Gas - COG

Potential Takeover Target Anadarko [APC] is Now $9 Billion Cheaper

Anadarko Petroleum's (APC) legal troubles likely haven't tarnished its allure for investors - instead, it has helped make APC $9 billion cheaper, and more appealing for a buyout, Bloomberg reports.

APC may be at the top of the list for multinational oil companies seeking purchases to turn around declining production, analysts say; a buyer willing to shell out $40B plus a premium would get a presence in fields where few big energy companies have exposure: the Niobrara formation in Colorado, Texas’ Eagle Ford shale basin, and offshore Africa.

APC would be an especially good fit for Exxon (XOM) or Chevron (CVX), Oppenheimer's Fadel Gheit says, although it's hard to see how a deal could be serious without a resolution to the Tronox lawsuit, which could leave APC on the hook for as much as $14B in environmental cleanup and health claims.

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A Fed Policy Change That Will Increase the Gold Price

By Doug French, Contributing Editor

For investors having a rooting interest in the price of gold, the catalyst for a recovery may be in sight. "Buy gold if you believe in math," Brent Johnson, CEO of Santiago Capital, recently told CNBC viewers.

Johnson says central banks are printing money faster than gold is being pulled from the ground, so the gold price must go up. Johnson is on the right track, but central banks have partners in the money creation business—commercial banks. And while the Fed has been huffing and puffing and blowing up its balance sheet, banks have been licking their wounds and laying low. Money has been cheap on Wall Street the last five years, but hard to find on Main Street.

Professor Steve Hanke, professor of Applied Economics at Johns Hopkins University, explains that the Fed creates roughly 15% of the money supply (what he calls "state money"), while the banks create "bank money," which is the remaining 85% of the money supply. Higher interest rates actually provide banks the incentive to lend. So while investors worry about a Fed taper and higher rates, it is exactly what is needed to spur lending, employment, and money creation.

The Fed has pumped itself up, but not much has happened outside of Wall Street. However, the Federal Open Market Committee (FOMC), during their October meeting, talked of making a significant policy change that might unleash a torrent of liquidity through the commercial banking system. Alan Blinder pointed out in a Wall Street Journal op-ed that the meeting minutes included a discussion of excess reserves and "[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage."

Blinder was once the vice chairman at the Fed, so when he interprets the minutes' tea leaves to mean the voting members "love the idea," he's probably right. Of course "at some stage" could mean anytime, and there's plenty of room in the word "reduction"—25 basis points worth anyway. Maybe more if you subscribe to Blinder's idea of banks paying a fee to keep excess reserves at the central bank. Commercial banks are required a keep a certain amount of money on deposit at the Fed based upon how much they hold in customer deposits. Banking being a leveraged business, bankers don't normally keep any more money than they have to at the Fed so they can use the money to make loans or buy securities and earn interest. Anything extra they keep at the Fed is called excess reserves.

Up until when Lehman Brothers failed in September of 2008, excess reserves were essentially zero. A month later, the central bank began paying banks 25 basis points on these reserves  and five years later banks, mostly the huge mega banks, have $2.5 trillion parked in excess reserves. I heard a bank stock analyst tell an investment crowd this past summer the banks don't really benefit from the 25 basis points, but we're talking $6.25 billion a year in income the banks have been receiving courtesy of a change made during the panicked heart of bailout season 2008. This has been a pure government subsidy to the banking industry, and one the public has been blissfully ignorant of.

But now everything looks rosy in Bankland again. The banks collectively made $36 billion in the third quarter after earning over $42 billion the previous quarter, showing big profits by reserving a fraction of what they had previously for loan losses. The primary regulator for many banks, the FDIC, is even cutting its operating budget 11%, citing the recovery of the industry. The deposit insurer will have one short of 7,200 employees on the job in 2014.

That's a third of the number it had in 1991 after the S&L crisis, but almost 3,000 more than it had in 2007 just before the financial crisis. So with all of this good news, the Fed may indeed be thinking they can pull out the 25bp lifeline and the banks will be just fine. What Blinder thinks and hopes is the banks will use that $2.5 trillion to make loans. After all, one-year Treasury notes yield just 13 basis points, while the two-year only kicks off 31bps. Institutional money market rates are even lower.

Up until recently, banks haven't been active lenders. The industry loan to deposit ratio reflects a tepid loan environment. During the boom, this ratio was over 100%. Now it hovers near 75%. It turns out that what the Fed has been paying, 25 basis points, has been the best source of income for that $2.5 trillion. However, banks won't be able to cut their loan loss reserves to significant profits for much longer. Loan balances have grown at the nation's banks the last two quarters and this will have to continue. If the Fed stopped paying interest on excess reserves and bank lending continues to increase, those $2.5 trillion in excess reserves could turn into multiples of that in money creation.

Banks create money when they lend. As Blinder explains, Fed injected reserves are lent "creating multiple expansions of the money supply and credit. Bank reserves were called 'high powered money' because each new dollar of reserves led to several additional dollars of money and credit." Fans of the yellow metal, like Mr. Johnson who sees the price going to $5,000 per ounce, have likely been too focused on the Fed's balance sheet when it's the banks that create most of the money.

When the Fed announces it won't pay any more interest on excess reserves, and banks start lending in earnest again, the price of gold will be very interesting to watch.

And when that happens, you'll want to be prepared. 

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The Fed Taper Explained by SPX Options

From our trading partner options guru J.W. Jones......

With the last major news item for 2013 less than 48 hours away, I thought I would share some insights as to what the S&P 500 Cash Index (SPX) options were pricing into the Federal Reserve’s monetary policy announcement due out Wednesday.

After the news is released and the week ends, it will be time for Santa Claus to come to Wall Street. While most people believe in the Santa Claus rally, what few understand is the bullish undertones that traditionally accompany a triple witching event.

This coming Friday, is a triple expiration. Equity options, index options, and futures contracts will be expiring this Friday. This event is traditionally known as “triple witching” and historically the quarterly expiration event ushers in serious bullishness.

According to Bank of America Merrill Lynch, “In the 31 years since the creation of equity index futures, the S&P500 has risen 74% of the time during this week. More recently, it has risen in ten of the past 12 years.” The chart shown below was posted on zerohedge.com and was provided by Bank of America Merrill Lynch......Read "The Fed Taper Explained by SPX Options"



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The Monster That Is Europe

By: John Mauldin

This week, Geert Wilders and his Party for Freedom in the Netherlands and Marine Le Pen of the Front National (FN) of France held a press conference in The Hague to announce that they will be cooperating in the elections for the European Parliament next spring and hope to form a new eurosceptic bloc. Their aim, as Mr. Wilders put it, is to "fight this monster called Europe," while Ms. Le Pen spoke of a system that "has enslaved our various peoples." They want to end the common currency, remove the authority of Brussels over national budgets, and undo the project of integration driven with so much idealism by two generations of European politicians. (My thought about Marine Le Pen after looking at her policies is that if Marine Le Pen is the answer for France, they are asking the wrong question.)

For now, Le Pen and Wilders are in a decided, if growing, minority (think Beppe Grillo, who got 25% in Italy in the last election). But as the graphic below suggests, the stitching that is holding the Frankenstein of Europe together seems to be getting a little frayed. And my new worry is that the real monster, one likely to pop many more of the tenuous stitches that hold things together, could be lurking in German banks. This week's letter explores a problem as "hidden" as subprime was back in 2006. Not as big, to be sure, but it might not need to be big to tug too hard the frayed threads that hold Europe together. (Note: this week's letter will print out longer than usual due to the large number of graphs and pictures.)



But first and quickly, we have finalized the dates for next year's Strategic Investment Conference. Mark your calendar for May 13-16. We are adding half a day so we can bring you a few more must-hear speakers. In addition to our always killer lineup of investment and economics thought leaders, I want to add some technology and politics. The significant difference about this conference is that there are no "B list" speakers. Everyone is a headliner. No one pays to get to speak or promote their deal. When we started the conference 11 years ago, my one rule was that we would invite speakers that I wanted to hear and create a conference that I would want to go to.

With my co-hosts Altegris Investments, we have done that and more. Attendees typically rate this conference as the best they attend. This year we have moved to San Diego, where we can have more space. We will still keep it small enough so that you can meet the speakers, as well as a room full of extremely interesting fellow attendees. You can sign up now and book your rooms by going to http://www.altegris.com/sic. Don't procrastinate. Mark down the dates and plan your time accordingly.

The Complacency of Consensus

"But where are you out of consensus?" came the question. I had just spent a few minutes outlining my view of the world to a group of serious money managers here in Geneva, highlighting some of the risks and opportunities I see. The gentleman's question made me realize that for the short-term, at least, I am all too sanguine for my personal taste. I have never thought of myself as one of those consensus guys. But when you consider that Japan is continuing down its path to starting a global currency war, with a currency that will drop at least in half from where it is now (plunging Japan into Abe-geddon); that China is launching its most serious economic overhaul in 20-30 years; that the US is still careening toward its day of reckoning with entitlement spending while dealing with the fall-out from taper tantrums in emerging markets; and that Europe is steering a course straight into deflation – the lot leaving us with Disaster A, Disaster B, or Disaster C as the consensus choice; then yes, I suppose I am a consensus guy, of sorts. But those are all worries that will come to a head later next year or the year after, not in the next few months or weeks, which is where most traders live. The trader who quizzed me wanted to know what was going to affect his book this week!

We seem to occupy a world where we are all somewhat uncomfortable. The problems are all so apparent; but somehow we are compelled to take risks anyway, hoping that the risks we take are properly managed or that we can exit at the propitious moment. The game seems to be moving along, absent another major shock to the system. It's not quite party like it's 2006, because the level of complacency is nowhere near the same; but we do seem headed down the same risk path, even though it scares us. Which means that it might take somewhat less than a subprime debacle and banking shock to trigger a crisis, since no one wants to be exposed when the next crisis happens. The majority of market players appear to believe that another crisis might materialize, but in the meantime you have to dance while the music is playing. Fifty Shades of Chuck Prince.

So, as investors and money managers, we must be on shock alert. Where will the next one come from? By definition, a shock is a surprise to the markets, something that few people recognize until it becomes too big to ignore. Ben Bernanke achieved a degree of infamy for saying that the subprime crisis would be contained, even as some of us were shouting that losses would be in the hundreds of billions (what optimists we were!). And then came the shock that created the biggest global economic crisis since the Great Depression.
But an almost desperate reach for yield and shouldering of risk are clearly in evidence. Junk bond issuance is over 2.5 times what it was in 2006 and twice as high as a percentage of total corporate bond issuance. Leveraged loans are back to all-time highs, even as credit spreads continue to fall (see graph).



Collateralized loan obligations (CLOs) are close to all-time highs after almost disappearing in 2009. And subprime auto-asset-backed paper is projected to set a new record in 2014. Party on, Garth!
But if you ask the participants in those very markets, and I do, if there is any sign that the reach for yield is easing, the answer is generally "Not yet." After 2008, everyone remains nervous; but when the analysis is done, enough buyers conclude that the future will be somewhat like the recent past. Although no one I talk to believes that in 2014 we will see another year in the stock market like the current one, still, the consensus outlook is rather sanguine. But I talk to more bulls than you might think. Last night in Geneva David Zervos was arguing (till rather late in the night, for me at least) his familiar spoos and blues with me (long S&P 500, long eurodollar). He is ready to double down on QE. Our hosts bought an excellent if outrageously expensive dinner (for the record, there is no other kind of meal in Geneva – can you believe $12 Diet Cokes?), and it was only polite to listen. And the trade has been right.

But for how long? Central banks are still going to be easy. But markets can be characterized as fully valued, at best, especially since there have been more earnings warnings this last quarter than at any time in the recent past. While the conditions are not quite the same as in 2006-07, we are getting a little frothy. So is it 2005, so that we can enjoy the ride into late 2006 and then look for an exit strategy? I would argue that the markets actually need a "shock" of some kind. And in addition to the "consensus-view" shocks mentioned above, I see one especially big, nasty lion lurking in the grass. In the form of German banks.

The Sick (German) Banks of Europe

Quick: I say "German banks," and what's the first thing that comes to your mind? The Bundesbank? Staid, no-nonsense central banking? The Bundesbank is all about maintaining the price of money – forget QE. Deutschebank? Big, German – must be stable and low-risk. The fact that southern Europeans are opening accounts left and right in DB must mean that DB is lower-risk than the local wild guys. Except that they have the largest derivatives portfolio, at $70 trillion (but don't worry because it all nets out, sort of, and of course there is no counter-party risk!), and they are the most highly leveraged bank in Europe (at 60:1 in the last tests – not a misprint), which might give you pause. Although their CEO argues that their leverage doesn't matter. And keeps a straight face. Just saying…

If something happens to DB, they are, in all likelihood, Too Big To Save, even for Germany. But Deutschebank is not my focus here today. It is their much smaller brethren, Too small to be called siblings, actually. More like first cousins twice removed. But there are a lot of them, and they all piled into some very interesting and, as it turns out, very questionable trades. And the story begins with the American consumer.
This Christmas, we will all engage, as will much of the world, in an orgy of gift giving. (I helpfully offer a few ideas of my own at the end of the letter.) The iPads and Xbox Ones and GI Joes with the Kung-Fu Grip (gratuitous esoteric movie reference) will be flying off the shelves. But the one thing that ties all those gifts together is The Box, the humble container unit, the TEU, which allows the world to transport all those items ever more cheaply. That story is resoundingly told in a book that Bill Gates featured in his Best Reads for 2013, simply entitled The Box.

You can read a great review here. It turns out that the shipping container was created in the '50s by a force-of-nature entrepreneur who fought governments and regulators (who typically tried to protect unions rather than help consumers) to bring the idea to market. It finally took off when the military decided it was the best way to ship material to the troops in Vietnam. It is one of those things that make sense and would have happened anyway, but as often happens, military spending drove the ramp-up.

The container was not without controversy. Longshoreman unions fought it aggressively, as containers meant fewer high-paying jobs. But The Box also meant far cheaper transportation of goods, and so it helped boost international trade. Now it is hard to imagine a world without containers. And even though the container business started in the US, there is not one US firm in the top 18 container shipping companies. The business is dominated by European and Asian firms.

And container ships were profitable. Oh my, fortunes were built. And they were so successful that a few German bankers looked at the easy money made by US bankers securitizing and packaging mortgages and decided they could do the same with ship financing. I know it is hard to believe, but the German government decided to create pass-through tax vehicles that gave serious tax preference to high-tax-rate investors for all sorts of things, including movies (such cinematic monuments as Terminator 3, I Robot, and the forgettable Stallone flick Get Carter were financed with German "tax shelters"); but my research has so far unearthed nothing to equal the German passion for financing ships. Seriously, would any US government entity give tax breaks to a favored industry? Would a Canadian or Australian or [insert your favorite country here] government? Such things are done by many governements, of course. Here we may apply Mauldin's Rule (stolen from someone else, I am sure): Any seriously out-of-whack financial transaction requires government involvement (generally in the form of some market-distorting law).

Cargo ships, especially container ships, were serious cash machines for long-term money. Buy the ship with some leverage, put it to work, and watch the cash roll in. The Greeks were especially good at this, but the Germans and Scandinavians caught on quick. The Germans went everyone one better and allowed small high-net-worth investors to put their money into funds that financed these ships. At one point, I am told, German banks might have been financing 50% of the world's cargo ships. (They control at least 40% of the world's container ship market today.) Anyone familiar with limited partnerships in the US in the late '70s and early '80s knows how this story ends for the investors.

I came across this story from the inside, as a business partner of mine is in the shipping business; but he owns and operates a special type of ship: massive tugboats that move ocean drilling-rig platforms, and those are still in healthy demand. But his original financing many years ago was from Germany.

It turns out that if a little leverage makes a deal look good, then a lot makes it look even better. In 2007, ships were financed at 75% leverage (on average). It looks like 2008 vintages were financed in the 90% range! (Data is from a presentation I was sent, done by Dr. Klaus Stoltenberg of NordLB.)

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Growing Oil and Natural Gas Production Continues to Reshape the U.S. Energy Economy

The Annual Energy Outlook 2014 reference case was released today by the U.S. Energy Information Administration (EIA) presents updated projections for U.S. energy markets through 2040.

"EIA's updated Reference case shows that advanced technologies for crude oil and natural gas production are continuing to increase domestic supply and reshape the U.S. energy economy as well as expand the potential for U.S. natural gas exports," said EIA Administrator Adam Sieminski. "Growing domestic hydrocarbon production is also reducing our net dependence on imported oil and benefiting the U.S. economy as natural-gas-intensive industries boost their output," said Mr. Sieminski.

Some key findings:

Domestic production of oil and natural gas continues to grow. Domestic crude oil production increases sharply in the AEO2014 Reference case, with annual growth averaging 0.8 million barrels per day (MMbbl/d) through 2016, when domestic production comes close to the historical high of 9.6 MMbbl/d achieved in 1970 (Figure 1). While domestic crude oil production is projected to level off and then slowly decline after 2020 in the Reference case, natural gas production grows steadily, with a 56% increase between 2012 and 2040, when production reaches 37.6 trillion cubic feet (Tcf). The full AEO2014 report, to be released this spring, will also consider alternative resource and technology scenarios, some with significantly higher long-term oil production than the Reference case.

Low natural gas prices boost natural gas-intensive industries. Industrial shipments grow at a 3.0% annual rate over the first 10 years of the projection and then slow to a 1.6% annual growth over the balance of the projection. Bulk chemicals and metals-based durables account for much of the increased growth in industrial shipments. Industrial shipments of bulk chemicals, which benefit from an increased supply of natural gas liquids, grow by 3.4% per year from 2012 to 2025, although the competitive advantage in bulk chemicals diminishes in the long term. Industrial natural gas consumption is projected to grow by 22% between 2012 and 2025.

Higher natural gas production also supports increased exports of both pipeline and liquefied natural gas (LNG). In addition to increases in domestic consumption in the industrial and electric power sectors, U.S. exports of natural gas also increase in the AEO2014 Reference case (Figure 2). U.S. exports of LNG increase to 3.5 Tcf before 2030 and remain at that level through 2040. Pipeline exports of U.S. natural gas to Mexico grow by 6% per year, from 0.6 Tcf in 2012 to 3.1 Tcf in 2040, and pipeline exports to Canada grow by 1.2% per year, from 1.0 Tcf in 2012 to 1.4 Tcf in 2040. Over the same period, U.S. pipeline imports from Canada fall by 30%, from 3.0 Tcf in 2012 to 2.1 Tcf in 2040, as more U.S. demand is met by domestic production.

Car and light trucks energy use declines sharply, reflecting slow growth in travel and accelerated vehicle efficiency improvements. AEO2014 includes a new, detailed demographic profile of driving behavior by age and gender as well as new lower population growth rates based on updated Census projections. As a result, annual increases in vehicles miles traveled (VMT) in light-duty vehicles (LDV) average 0.9% from 2012 to 2040, compared to 1.2% per year over the same period in AEO2013. The rising fuel economy of LDVs more than offsets the modest growth in VMT, resulting in a 25% decline in LDV energy consumption decline between 2012 and 2040 in the AEO2014 Reference case.

Natural gas overtakes coal to provide the largest share of U.S. electric power generation. Projected low prices for natural gas make it a very attractive fuel for new generating capacity. In some areas, natural-gas-fired generation replaces power formerly supplied by coal and nuclear plants. In 2040, natural gas accounts for 35% of total electricity generation, while coal accounts for 32% (Figure 3). Generation from renewable fuels, unlike coal and nuclear power, is higher in the AEO2014 Reference case than in AEO2013. Electric power generation from renewables is bolstered by legislation enacted at the beginning of 2013 extending tax credits for generation from wind and other renewable technologies.

Other AEO2014 Reference case highlights:

• The Brent crude oil spot price declines from $112 per barrel (bbl) (in 2012 dollars) in 2012 to $92/bbl in 2017. After 2017, the Brent spot oil price increases, reaching $141/bbl in 2040 due to growing demand that requires the development of more costly resources. World liquids consumption grows from 89 MMbbl/d in 2012 to 117 MMbbl/d in 2040, driven by growing demand in China, India, Brazil, and other developing economies.

• Total U.S. primary energy consumption grows by just 12% between 2012 and 2040. The fossil fuel share of total primary energy demand falls from 82% of total U.S. energy consumption in 2012 to 80% in 2040 as consumption of petroleum-based liquid fuels falls, largely as a result of slower growth in LDV VMT and increased vehicle efficiency.

• Energy use per 2005 dollar of gross domestic product (GDP) declines by 43% from 2012 to 2040 in AEO2014 as a result of continued growth in services as a share of the overall economy, rising energy prices, and existing policies that promote energy efficiency. Energy use per capita declines by 8% from 2012 through 2040 as a result of improving energy efficiency and changes in the way energy is used in the U.S. economy.

• With domestic crude oil production rising to 9.5 MMbbl/d in 2016, the net import share of U.S. petroleum and other liquids supply will fall to about 25%. With a decline in domestic crude oil production after 2019 in the AEO2014 Reference case, the import share of total petroleum and other liquids supply will grow to 32% in 2040, still lower than the 2040 level of 37% in the AEO2013 Reference case.

• Total U.S. energy-related CO2 emissions remain below their 2005 level (6 billion metric tons) through 2040, when they reach 5.6 billion metric tons. CO2 emissions per 2005 dollar of GDP decline more rapidly than energy use per dollar, to 56% below their 2005 level in 2040, as lower-carbon fuels account for a growing share of total energy use.

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Weekly Futures Market Recap - Natural Gas, Gold and Coffee

For this weeks weekly futures recap we've asked our trading partner Mike Seery to weigh in on three of our favorite markets. Natural gas, gold and coffee......

Natural gas futures were up another 24 points this week in the January contract trading at 4.35 still above its 20 & 100 day moving average now hitting a 6 month high continuing its bullish momentum with extreme cold weather throughout much of the country stirring up demand as temperatures are far above average causing natural gas prices to continue its bullish run.

Many of the other commodities are starting to move higher with natural gas and in my opinion a triple bottom has occurred around 3.50 and as I’ve written in many previous blogs I am just outright bullish the natural gas sector due to the fact that I do believe the United States government is going to mandate natural gas usage here in the next 3 to 5 years which could double or triple prices just on demand without factoring any weather premium and in my opinion I’m advising all investors who have a long term horizon to be buying natural gas in the December contract of 2015 and holding because prices could skyrocket from these ridiculously low levels.

Remember natural gas prices traded as high as 13 – 14 just in the year 2008 that’s how far we’ve come and with the green energy policies and the trend getting away from fossil fuels continuing I believe natural gas demand will soar in the next decade as traders will shake their heads wondering why they were not in natural gas at 4.00.
TREND: HIGHER
CHART STRUCTURE: EXCELLENT

Gold futures had a wild trading week with a $30 up day and $30 down day finishing up about $5 for the trading week in the February contract going out this Friday in New York at 1,235 an ounce finishing up $11 this Friday afternoon as the trend still remains bearish in my opinion & I still believe that there’s a high probability that prices will retest the summer lows of 1,180 here in the next couple of weeks.

Next week will be very interesting to see if the Fed does taper bond purchases and how these markets will react so expect extreme volatility in the precious metals especially if tapering is announced. I would definitely expect prices to drop rather significantly quickly but the opposite could happen as well as if there is no tapering you could get a big knee jerk reaction to the upside so I’m advising just to sit on the sidelines and see what the statement says and go from there because it’s like flipping a coin at this time but the trend is to the downside so at least in the short term prices still look vulnerable.

Gold is still trading below its 20 and 100 day moving average we really have gone nowhere in the last month but we had extreme volatility as there is major support down at those levels. Gold is down about 35% from its all-time high of about 1,900 just a couple years ago and eventually there will be a bottom in this market I just don’t think quite yet.
TREND: LOWER
CHART STRUCTURE: OK

Coffee futures have broken out to a 7 week high trading nearly up 900 points this week currently at 115.20 in the March contract as a possible bottom has finally been formed after hovering around 5 year lows as the bulls have come back in this market with the next major resistance at 120. If you think coffee prices have bottomed my recommendation would be to buy a futures contract place a stop below the contract low of about 104 risking around $4,000 per contract as coffee is one of the largest commodities contracts with as every 100 points equaling $375 profit or loss.

The fundamentals have not changed in coffee with large world supplies and low demand at this time but eventually prices come to a bottom but I’m not 100% convinced that the sell off is over but I certainly would not be short this market as the short term trend is higher and I always try to trade with the short term trend. Coffee futures are trading above their 20 day moving average but still below their 100 day moving average which stands at 119 and I suspect that there will be some buy stops up at that level so prices could still have more room to run to the upside in the next several days.currently.
TREND: HIGHER
CHART STRUCTURE: EXCELLENT


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GOLD’s Elliott Wave Analysis Bear Cycle Coming to a Close in December

When it comes to the actual trading aspect in gold our trading partner David A. Banister Market Trend Forecast has been our go to guy. Very interesting what he is bringing us this morning.....Is GOLD’s Elliott Wave Analysis Bear Cycle Coming to a Close in December?


Our Last major Elliott Wave Analysis of Gold came in early September when Gold had touched the 1434 area, and in that analysis we called for a re-test of 1271-1285 levels. This was based on our Elliott Wave Analysis of the patterns involved since the 1923 spot highs in the fall of 2011. Our clients of course were updated on a regular basis since that public analysis and we have been looking for clues to a bottom in this Gold bear cycle from the 2011 highs.

Most recently, we noted that we are seeing patterns commiserate with what Elliott wave theory calls a “truncated 5th wave” pattern. All Bear cycles have 5 full waves to the downside from the highs, and we have been in wave 5 since the 1434 highs. The key then is determining how low that wave 5 will take you in Gold, and planning your investments and timing around that forecast.

To qualify for a truncated 5th wave, you have to have a very strong preceding 3rd wave to the downside. In this case, we had that as Gold dropped from just over 1800 per ounce to 1181 into late June 2013. As we approached the 1181 areas, we also put out a public forecast saying that Gold has indeed bottomed and should rally strong to the upside. Recently, Gold hit a bottom at 1211 spot pricing last week and that is when we began to consider a truncated 5th wave pattern.

We sent our clients about a week ago regarding this possible Elliott wave theory bottom:

If we fast forward a week later, we had Gold running up to 1261 which was the pivot resistance line we told our subscribers to watch for. We hit it on the nose and backed off to 1224 yesterday. We now expect that if GOLD holds the 1211 area, that we will again rally back up and over 1261 and then head to the 1313 resistance zone. We would like to see Gold get over 1313 and if so our targets are in the 1560 ranges for Gold in the first half of 2014.

Aggressive investors should be accumulating quality small cap gold producing and exploration, or Gold itself depending on your preference during these last few weeks of December as our Elliott Wave Analysis is signaling a bottom is near. We would again watch 1211 as a key level to hold for this possible truncated wave 5 to work out.

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Anadarko gets three downgrades after court decision, shares Down 11.5%

Anadarko Petroleum (APC) almost certainly will appeal yesterday's court ruling against it in the Tronox litigation: "We vehemently disagree with the judge's decision... We fully expect to pursue every avenue available to us through the appellate process to protect the interests of our stakeholders, once a final judgment including damages has been rendered."

The severity of the ruling for APC will come down to damages: While the judge found that the trust is entitled to recover $14.17B, APC may be able to lower the figure by $9B for offsetting costs it may have incurred from the Tronox transaction.

J.P. Morgan downgrades APC to Underweight and a $77 price target, while Citi and Global Hunter cut shares to Neutral from Buy; Credit Suisse views $65-$70 as a potential floor level valuation.

Jefferies, maintaining a Buy rating and $111 price target, believes APC could pursue more aggressive dividend/buyback moves to instill shareholder confidence that the ruling will be found excessive.


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Six Traits of Successful Retirees

By Dennis Miller

When I coached baseball many years ago, a young ballplayer came to me asking for advice. I offered my opinion: he needed to get his act together. Then, like many young men might do, he griped about me to one of the other coaches. Our paths crossed again when he was 28 years old, at which point he said, "Now that I have a family of my own, I've thought back on your 'lectures' and realized you were just answering my questions honestly. Thank you."


Not surprisingly, my lectures as a coach weren't so different from those I'd received from a WWII colonel turned coach and teacher at my high school. The only difference: I never asked for his opinion, it was offered as he held my shirt collar. Still, when I came home on leave from the Marine Corps a few years later, I showed up at my old high school, walked onto the practice field, and thanked him. He was a solid mentor when I needed one but was too young to know it.

Years later, as a retirement mentor, I've spent countless hours analyzing the habits shared by successful retirees. Six stand out, and I urge all of our readers to take these steps sooner rather than later. I'm not going to grab you by the shirt collar like my coach did, but I'm confident you'll find this "lecture" worth reading.

1. Cut the financial cord with your children. All parents have one basic responsibility: to equip their children to survive on their own, both emotionally and financially.
   
   Retirees are often the wealthier members of an extended family, or they are perceived as such. But having money does not make you a bank. If a family member needs money, let him or her borrow it elsewhere. The wealth you've accumulated has to last you the rest of your life. The best way to remind your family and yourself of this simple fact is to simply say "no."
   
   Of course, some accidents and disabilities cannot be prevented, and there are times to rally behind family members truly unable to put a roof over their heads or food in their bellies. But for every truly unavoidable catastrophe, there are dozens more instances of parents enabling a freeloader.
   
   You've worked too hard to sacrifice your financial independence and give up your golden years. Even if you have enough to support two generations indefinitely, being the "Bank of Parents" won't help anyone in the long run.
2. Be your own "pension fund" manager. Independence is the real goal of retirement. That means listening to experts, but also learning to make savvy financial decisions for yourself.
   
   Today, pensions are virtually nonexistent in the private sector. Soon they won't exist in the public sector either. So all of your retirement, including saving, investing, debt reduction, tax planning, estate planning, is up to you.
   
   There's a lot to learn, but the information is there for the taking. I've known too many people who retired with a large chunk of change only to panic because they had no clue how to manage it. These folks were afraid, rightly so, because their lack of financial know how made them vulnerable.
   
   Give yourself a financial education while you're accumulating wealth so you can enjoy that wealth once you retire. Otherwise, you might leave a high stress job for a high stress retirement.
3. Maximize your tax-preferred retirement savings. Only 10% of those eligible for employer-sponsored 401(k) programs maximize their contributions. There are real financial benefits to contributing to your 401(k), and it's a mistake to turn down that free money, especially if your employer will match all or part of your contributions.
   
   In that same vein, tapping into retirement accounts to pay off bills is almost always a mistake. Unless you absolutely need the money for basic survival, you're much better off leaving your retirement money alone. Like many things in life, once you tap those funds, it gets easier and easier to do it again.
   
   Before Congress passed the first Social Security Act in 1935, retirement was for a wealthy few. Since then, Social Security has fostered the illusion that we need not worry about money and that retirement doesn't require a large personal nest egg. Reality is far harsher.
   
   I know people who've tried to live on their Social Security alone; now they are all back at work. A happy retirement rarely comes for people who choose to worry about retirement later.
4.  Get out of debt. Many retirees are drowning in debt. It's a topic we touched on in The Reverse Mortgage Guide when discussing why seniors are turning to reverse mortgages at an increasingly younger age.
   
   Independence is pretty hard when you don't have any money. And don't fool yourself: if you have a million dollars in your brokerage account and a million dollar mortgage, you're broke. Forget all the fancy formulas. When you stop paying people to rent their money, that's when real wealth building can start.
5. Get some professional help. Even if you have a small nest egg, I strongly recommend going to a professional certified financial planner (CFP) for a regular checkup. I don't mean pay someone to manage your money, although that is an option. Much like an annual physical, however, we can all benefit from an independent, qualified professional assessing where we are and how to stay (or get) on course.
   
   The checkup might cost a few hundred dollars, but it's money well spent. Retirees cannot afford to be penny wise and pound foolish.
6. Get in synch with your spouse sooner rather than later. During your working years, you trade time and expertise for money. For most folks, the goal is to save enough so that they don't have to work full time to survive. Then, during retirement you trade money for time to pursue other interests. Sad to say, many people struggle to pinpoint what those interests are once they get there. One spouse might want to travel while the other is a homebody, etc.
   
   Retirement is no fun if only one spouse is living their dream. Happier couples talk and plan how they want to spend their time long before retirement day.

As someone in or approaching retirement age, you've lived long enough to be a mentor in some area of life. So you already know that mentoring is about telling people what they need to hear, whether it's on the baseball field, in the boardroom, or at the kitchen table (where most life lessons are learned).
I urge you to pass your own "secrets to success" on to the next generation; they will thank you for it… eventually.

In addition to our regular weekly and premium monthly issues, we've been hard at work producing a series of special reports on need to know retirement topics: financial advisors, reverse mortgages, income-producing stocks and low-fee ETFs, to name a few.

You can download each of these timely special reports individually; or, if you really want to kick start your financial education, you can begin your Money Forever premium subscription now and receive access to all of our special reports, our current issue, and the Money Forever archives.


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Mid Week Market Summary for Wednesday December 11th

The S&P 500 closed lower on Wednesday. The low range close sets the stage for a steady to lower opening when Thursday's night session begins trading. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. If March renews this year's rally into uncharted territory upside targets will be hard to project. Multiple closes below last Wednesday's low crossing at 1774.80 are needed to confirm that a short term top has been posted. First resistance is November's high crossing at 1805.50. Second resistance is unknown. First support is last Wednesday's low crossing at 1774.80. Second support is the reaction low crossing at 1769.00.

Crude oil closed lower due to profit taking on Wednesday as it consolidated some of the rally off November's low. The low range close sets the stage for a steady to lower opening when Thursday's night session begins. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near-term. If January extends the rally off November's low, the 50% retracement level of the August-November decline crossing at 99.87 is the next upside target. Closes below the 20 day moving average crossing at 95.16 would confirm that a short term top has been posted. First resistance is today's high crossing at 98.75. Second resistance is the 50% retracement level of the August-November decline crossing at 99.87. First support is the 20 day moving average crossing at 95.16. Second support is November's low crossing at 91.77.


The single biggest advantage System & Quant traders enjoy and the fatal mistake it helps them avoid 

Natural gas closed sharply higher on Wednesday and above the 62% retracement level of this year's decline crossing at 4.307 as it extends the rally off November's low. The high range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If January extends the rally off November's low, the 75% retracement level of this year's decline crossing at 4.487 is the next upside target. Closes below the 20 day moving average crossing at 3.902 would confirm that a short term top has been posted. First resistance is today's high crossing at 4.340. Second resistance is the 75% retracement level of this year's decline crossing at 4.487. First support is the 10 day moving average crossing at 4.082. Second support is the 20 day moving average crossing at 3.902.

Gold closed lower as it consolidated some of on Tuesday rally but remains above the 20 day moving average crossing at 1250.50. The low range close sets the stage for a steady to lower opening when Thursday's night session begins trading. Stochastics and the RSI are bullish signaling that sideways to higher prices are possible near term. If February extends Tuesday's rally, the reaction high crossing at 1294.70 is the next upside target. If February renews the decline off August' high, June's low crossing at 1187.90 is the next downside target. First resistance is Tuesday's high crossing at 1267.50. Second resistance is the reaction high crossing at 1294.70. First support is last Friday's low crossing at 1210.10. Second support is June's low crossing at 1187.90.

Silver closed higher on Wednesday as it extended the rally off last Wednesday's low. The low range close set the stage for a steady to lower opening when Thursday's night session begins trading. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near term. If January extends this week's rally, the reaction high crossing at 20.805 is the next upside target. If January renews the decline off October's high, June's low crossing at 18.615 is the next downside target. First resistance is today's high crossing at 20.430. Second resistance is the reaction high crossing at 20.805. First support is last Wednesday's low crossing at 18.900. Second support is June's low crossing at 18.615.

The U.S. Dollar closed lower on Wednesday as it extends the decline off November's high. The mid range close sets the stage for a steady to lower opening when Thursday's night session begins trading. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If March extends the decline off November's high, October's low crossing at 79.35 is the next downside target. Closes above the 20 day moving average crossing at 80.82 would confirm that a short term low has been posted. First resistance is the 20 day moving average crossing at 80.82. Second resistance is November's high crossing at 81.73. First support is today's low crossing at 79.87. Second support is October's low crossing at 79.35.

The Japanese Yen closed higher due to short covering on Wednesday. The mid-range close sets the stage for a steady opening when Thursday's night session begins trading. Stochastics and the RSI are diverging but are neutral to bearish signaling that sideways to lower prices are possible near term. If March extends the decline off October's high, weekly support crossing at .9640 is the next downside target. Closes above the 20 day moving average crossing at .9857 are needed to confirm that a short term low has been posted. First resistance is last Thursday's high crossing at .9845. Second resistance is the 20 day moving average crossing at .9857. First support is Tuesday's low crossing at .9678. Second support is weekly support crossing at .9640.

Coffee closed lower on Wednesday. The low range close set the stage for a steady to lower opening on Thursday. Stochastics and the RSI are turning bullish signaling that sideways to higher prices are possible near term. Closes above the reaction high crossing at 11.29 are needed to renew the rally off November's low. If March renews last week's decline, November's low crossing at 10.41 is the next downside target.

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Mish's Mid Week Market Minute $SPY $IWM $DIA $QQQ

Michelle "Mish" Schneider gives a quick run down of this market like no one else can. Here's her Free Market Minute for Wednesday....

Flat has several meanings. 1. Smooth and even, without marked lumps or indentations. I wonder how many can say that about their equity after Tuesday’s session? 2. Lacking interest or emotion; dull and lifeless. That’s a yes! 3. In or to a horizontal position. Describes the market internals or McClellan Oscillator.

The S&P 500 is flat. Flat as a word has several more urban definitions; but I will leave that to your own curiosity to look up online. Speaking of, Google (GOOG), far from flat, did make new highs.

Volume equally flat with an exception to the small caps, Russell 2000s, which posted a rather small distribution day. Remember, when you’re flat on your back, everything looks up!

S&P 500 (SPY) Held the fast moving average, which by the way, is flat.

Russell 2000 (IWM) Broke the fast moving average with 111 an important support level

Dow (DIA) Closed just shy of the fast moving average but also on support. Also have to mention that IWM SPY and DIA did not make new highs recently while QQQs did

Nasdaq (QQQ) Marginally worked off overbought conditions

XLF (Financials) Volcker rule announcement had an impact. Sitting on support

SMH (Semiconductors) Holding the runaway gap

XRT (Retail) With a 6 day correction, 85.60 is pretty much the risk should this start to turn up

IYT (Transportation) Marginally held 128.40

IBB (Biotechnology) Held 219 and still digesting

IYR (Real Estate) 63.20 is the place to hold now

XHB (Homebuilders) Floundering around above the 50 DMA

GLD Gapped up so that reversal candle was good after all-now, 122 great resistance

USO (US Oil Fund) Cleared the 200 DMA-and baby, it’s cold outside!

XLE (Energy) 2 inside days-good one to focus on for range break

TBT (Ultrashort Lehman 20+ Year Treasuries) TLTs doesn’t believe taper talk it seems

EWG (Germany) 30.33 is the low of the island top to clear to negate that pattern


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