Putting the Oil Spill in Perspective

by Addison Wiggin & Ian Mathias

  • BP, oil spill cleanup… and the “real” disaster you should be concerned with

  • July jobs report lame, June revisions awful… Street yawns, for once

  • Wheat cracks $8 level… Chris Mayer on what to expect next

  • Medicare insolvency delayed by a decade… if you believe accounting fictions

  • Readers again fill our suggestion box with how to cut government spending

 

  Indeed, even with the government’s report declaring the cleanup 75% complete, the Gulf of Mexico recovery will be slow and laborious. And expensive…

  As of a few hours ago, there’s enough fresh cement in the Macondo oil well to hold down the “mud” that’s keeping the oil beneath the seafloor. It’s not the final step in plugging the hole, but it’s a big one. Now the tallying begins.

BP reckons its repair and cleanup costs will total $32.2 billion — of which $2.9 billion has already been spent.

But let’s say, for argument’s sake, the costs end up being double what BP estimates. Call it $64 billion. That’s certainly a lot of money. And who knows what the long-term effects of the spill will be on the economy in the Gulf region.

  Then there’s the industry itself. The feds are now suggesting they may end their ban on deep-water drilling before the original Nov. 30 deadline. But that may not be soon enough.

Work on 33 exploratory wells was stopped as a result of the government’s reaction to the Deepwater Horizon disaster. “We probably won’t be anywhere near 33 rigs” when that work resumes, our oilman Byron King reports. “It’s not like they’re waiting at the pier” for the go-ahead.

Instead, some of the most advanced offshore drilling gear in the world was idled by the ban. It’s now going overseas, where the recovery will be much quicker — if it ever even missed a beat. That’s good news for oil companies in places like Norway and Brazil. But not so much for those operating in the Gulf.

  Already considered the history’s worst oil spill, could the BP blowout have been any worse? Let’s try to gain a little perspective.

Fannie Mae just registered another quarterly loss — three straight years of losses, if you’re keeping score at home. Thus, Fannie is headed back to the well at Treasury for another $1.5 billion in aid. Make that $86.1 billion in total aid that Fannie has vacuumed up from the U.S. taxpayer to date.

There is little evidence the money Treasury is pumping into Fannie is accomplishing anything. It won’t repair or rebuild a single home. It won’t help a strapped homeowner avoid foreclosure. It won’t help a solvent homeowner build equity.

The Fannie bailout is like a neutron bomb — destroying paper wealth, but leaving physical structures intact. You want some bigger black hole numbers?

• AIG has sucked up $118 billion so far — with another $64 billion to go

• General Motors got a $49 billion bailout .

All told, the Fed and the U.S. government have lent, spent or guaranteed $8.2 trillion in taxpayer money to keep the financial system on life-support. They could have cleaned up ‘the worst oil spill in history’ over 254 times with the money that’s been spent on bailouts, backstops and boondoggles. BP, a publicly traded company, is, as they should, promising to take responsibility and foot the whole bill.

We don’t want to minimize the disaster… but from a sheer dollars standpoint, it pales in comparison.

With the blowout in the Gulf, the U.S. government learned that the field beneath the Macondo geyser contains some of the most-productive known reserves in the world. Give the American public a few years to forget — and for the government to rearrange the rights — and you’ll see “some of the highest bids for oil leases at auction to ever grace the planet,” says Byron.

In the meantime, Byron’s especially excited about the prospects for two penny stock drillers working some of those aforementioned overseas fields. One you can’t even buy. Not yet, anyway — it’s working on an IPO. But the other you can buy today. Byron tells the whole story in this presentation. See for yourself.

  “The epidemic of negative home equity won’t be cured anytime soon,” writes our stock market vigilante Dan Amoss, expanding on the cleanup effort in the Fannie Mae disaster. “It’ll require savings capital formation, a rebound in youth employment and household formation.

 

“We know that the lack of jobs and savings is the missing ingredient, because lower mortgage rates aren’t sparking a rebound in housing demand. Thirty-year fixed rate mortgage rates are now just 4.5%, down from 5.3% in August 2009. Yet according to the Mortgage Bankers Association, loan applications for new home purchases are back to 1996 levels.

 

“The homebuyer tax credit pulled forward future demand into late 2009/early 2010. Now that the tax credit has elapsed, demand is snapping right back to a very depressed level.

“In May, the National Association of Realtors reported a 30% month-to-month collapse in its index of pending home sales (see red line in the chart below).

“Then, just this week, it was announced that the index fell another 2.6% from May to June. Housing demand is clearly dismal without the tax credit. The blue line shows the year-over-year trend. It’s reversing the late 2009 tax credit-driven surge” 

  Another first Friday of the month, another unintended consequence of the housing blowout: The Labor Department report 131,000 jobs lost in July. Let’s break it down…

• Add 71,000 new private-sector jobs

• Subtract 143,000 Census workers

• Subtract 11,000 non-Census federal employees (yes, Uncle Sam fired people!)

• Subtract 48,000 state and local government workers

Yesterday, John Williams from Shadow Government Statistics pretty much called it: “July nonfarm payrolls should show an outright monthly contraction, ex-Census workers.” Back out the Census, and a mere 12,000 jobs were added.

Oh, the June figures got revised significantly downward. Originally, the reported drop was 125,000. Now it’s nearly double — 221,000.

Take account of all the revisions so far this year and on average, we’re adding fewer than 100,000 jobs a month — not even enough to keep pace with new entrants to the labor force.

The U-3 unemployment rate you see reported on TV remained steady at 9.5%. U-6 unemployment, including part-timers who want full-time work, is also unchanged at 16.5%.

  The number of Americans on food stamps has hit another record, too — 40.8 million as of May. That’s one in eight Americans… and 19% more than a year earlier.

  The unemployment numbers were worse than the Street expected. But the reaction appears to be a sigh, not a snit. The major indexes opened down around 0.7%, and have recovered a bit since.

In fact, the S&P still sits a hair above 1,120 — a level that’s held all week, and a level technicians seem to think is significant. As such, it’s no doubt plugged into the algorithms of the high-frequency traders who now account for 70% of market volume.

  The BLS repot did put a hurt on the greenback, however, if only a slight one. The dollar index stands at 80.2, territory last seen in mid-April. Bonds have rallied: A 10-year Treasury note yields a pitiful 2.85% this morning.

  In a rare instance during 2010 of the dollar and gold moving inversely, the money metal has cracked through $1,200 once again, to around $1,207 as we write.

  Wheat prices just cracked $8 a bushel, a day after Russia announced a ban on exports. By some accounts, the drought there has wrecked a third of all arable land. Wheat has now nearly doubled in two months.

“Russia's crop failure comes at a bad time,” says Chris Mayer, who keeps an eagle eye on the farm sector. “Most of the world's wheat exporters are having problems. The Aussies battle locusts. The Canadians suffer from too much rain. Even European farmers struggle with drought.

“One key difference this time around compared to 2007-08 is that inventories are in better shape — at least on paper.” Chris is skeptical. In India, for example, the government has let once-plentiful grain stockpiles rot in the fields. “In a common display of government folly,” he explains, “bureaucrats, apparently, threw thin plastic sheets over these supplies and let them sit in the fields to rot and wash away in the rains.

“The savior in all this looks like it will be the U.S. Stockpiles here should be healthy, at almost 30 million tons.

“Expect ripples across the food chain. Prices for everything will rise. Prices for cocoa, coffee and pork bellies have already gone up. Beer brewers will pay more for barley, as the barley crop will be down by 20%. All flour-related products — breads, biscuits and the like — will be more costly.” Not by coincidence, the fertilizer stocks Chris follows have rallied by more than 30% from their lows a month ago.

[Ed note: Chris told Mayer’s Special Situations readers to take profits yesterday on Detour Gold — 132% in 15 months. Were you among them? “I actually made almost 200% on this one,” a happy reader wrote Chris in return. “You have paid my Reserve fee.”

If you’re interested, you can still test-drive Mayer’s Special Situations for a mere $1. Sign up today and you can review his firsthand report from our trip to China — stuffed with eight promising U.S.-listed Chinese stocks — free.]

  The insolvency of Medicare has been pushed back more than a decade, according to the latest annual report of the program’s trustees.

Last year, Medicare was supposed to run short of money to pay beneficiaries in 2017. Now it’s 2029… thanks to all the new revenue that health insurance “reform” is supposed to generate.

Of course, once that revenue hits the Medicare trust fund, it’ll immediately flow out so more people will have health insurance. IOUs will be left in its place. So the whole report amounts to an accounting fiction.

Here’s the sequel: The same accountants reckon the Social Security trust fund will run dry in 2037… after running deficits in 2010, 2011 and every year from 2015 on.

  “I have been considering the best way to reduce government expenditures & put money into the citizens’ hands,” a reader writes. “Why not give everyone all the money they and their employers have paid into Social Security and do away with any further payments in the future?”

The 5: Oh, we don’t know… Maybe because Uncle Sam spent the money already? OK, we promise not to interrupt again…

  “Those currently receiving SS,” the reader continues, “could elect to continue to receive their monthly check or a lump sum. This would put a lot of money into the public’s hands to do with as they see fit: save it, pay down debt, spent it. But after they get their check, everyone is on their own to provide for their future, instead of the government looking out for everyone.

“With no more SS tax being taken out of everyone’s paycheck, business owners would have another 6.5% for every employee that they could put into their business as profits, to reinvest into the business or to buy other companies.

“I know there will be a lot of nooooooooos from older people. (I am now on SS and would take my lump sum offer), but we will all be dead in 20 years or so and this would get the government out of our pockets and more money into our pockets to use as we see fit. The only down part of this bill would be that all of those working at Social Security would be out of work. What a novel idea… less government employment.”

  “All I see,” another reader writes, as if in response, “is comments on where the bailout money could have been better spent. If there was no bailout, we would be in the earlier part of a boom. After those thousands of banks, trusts, holding companies and hedge funds went under, yeah, unemployment would have been through the roof.

“But the bad loans would have been cleared, and there would be dirt-cheap commercial property for anyone that wanted to start a business. The chances of success in business would be a lot higher. With the greatly reduced overhead, businesses could expand much more quickly, hire more people and do all this through profits, rather than finance.

“Instead, with the bailouts, we are guaranteed very slow growth, in about five-10 years.”

Well, at least you can enjoy your weekend,

Addison Wiggin

The 5 Min. Forecast

P.S. Dan Amoss’ most recent housing-related recommendation is up 50% in just three weeks. Later today, Mr. Amoss will release his latest short — a $25 stock he sees headed to $15 on continued weakness in housing. If you want to be on board when his alert is issued, here’s where to go.

rspertzel

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