Strategic Energy Disaster

Dave Gonigam – December 22, 2011

  • Canadian prime minister pipes up, prompting Byron King to declare a “strategic energy disaster” for the U.S.
  • One number up, another number down, Wall Street nearly flat: Steve Sarnoff on the chances for a year-end rally
  • Double dip, or just “muddle through”? Checking in with two reliable recession indicators…
  • An MF Global creditor who’s already collected… a peek inside Ron Paul’s portfolio… a pitiful gold tale from Greece… a holiday potpourri of reader mail… and more!

   “We’re watching a strategic energy disaster unfold for the United States,” declares Outstanding Investments editor Byron King.

“Canada’s oil is going away. Say bye-bye.”

Byron saw this coming: “Delay may kill the Keystone XL expansion,” he said in our Nov. 16 edition, after the White House punted on whether to go ahead with the project until after the 2012 elections.

What has Byron convinced it’s dead now?

   ”When I was down in the United States recently,” said Canadian Prime Minister Stephen Harper on Monday, “it was interesting. I ran into several senior Americans who all said, ‘Don’t worry, we’ll get Keystone [pipeline] done. You can sell all of your oil to us.’”

“I said, ‘Yeah we’d love to’,‘ but I think the problem is now that we’re on a different track.’”

The different “track” might well turn out to be a different pipeline. Instead of shipping oil from the sands of Alberta down through the Great Plains to the U.S. Gulf Coast… Canada might well build a pipeline to its Pacific Coast, where the oil would be loaded on tankers bound for China.

“I am very serious,” said Harper by way of underscoring the point, “about selling our oil off this continent, selling our energy products off to Asia. I think we have to do that.”

Madness, Byron says. “America has fought wars over energy resources that are 8,000 miles away because our ‘way of life is nonnegotiable,’ according to former Vice President Dick Cheney.

“Yet now the country won’t secure a century’s worth of energy security by expanding its north-south pipelines with longtime ally Canada? What utter folly.”

Byron explains why “the U.S. has just lost a major round in the great global game of national existence”… and he explores the investment implications… in today’s Daily Resource Hunter.

   First-time unemployment claims dropped last week to 364,000 — the lowest level since April 2008. The more stable four-week moving average is back to June 2008 levels.

Given the slippery nature of these numbers, it’s too early to tell whether this is a surge of part-time help for the holidays… or a sustainable trend.

   GDP grew at an annualized 1.8% in the third quarter, according to the Commerce Department’s final estimate of that figure.

That’s down from last month’s guess of 2.0% and also below the “expert consensus” of economists polled by Bloomberg.

   The two aforementioned figures essentially cancel out in the minds of the few traders who haven’t already knocked off for the holidays and hit the eggnog. The main U.S. indexes are up about a quarter percent.

   “Bulls are trying to muster support for a year-end rally,” wrote Options Hotline editor Steve Sarnoff to his readers last night, “as thin holiday-trading conditions set in.

“Technical resistance will remain a challenge, and currency swings could enhance stock market volatility. Between European debt woes and our woeful do-nothing Congress, a Wall of Worry is being built.”

“Over the weeks ahead, we shall see if share prices climb, slip or cling to it. I suspect we will see some substantial swings.”

   Two of the most reliable recession indicators are out on the same morning… and both signal a continuation of what Vancouver favorite John Mauldin calls the “muddle-through” economy.

The Chicago Fed National Activity Index — a composite of 85 data points — slipped last month to -0.37. That’s “below historical trend” in the parlance of the number crunchers. But both the November figure and three-month average of -0.24 remain well above the -0.70 reading that’s signaled every recession of the last 40 years.

Meanwhile, the Philadelphia Fed State Coincident Index moved up in November to a reading of 80.

This number is a composite of four employment indicators taken from all 50 states. Readings below 50 have signaled every recession of the last 30 years — at least until recently.

There was a false alarm last year… and barring a sharp reversal in the first quarter of 2012, it appears the dip below 50 from May-August of this year is another head fake.

We don’t presume to read the minds of Federal Reserve governors here at The 5… but if the Fed is looking for reasons to unleash QE3 at its January meeting, they’re not in these numbers.

Nor are they in the stock indexes — which we point out because that is the first thing Ben Bernanke cites when he says QE2 “worked.”

When he signaled the advent of QE2 in August 2010, the S&P was around 1,050. For all the volatility of the last four months and change, the S&P has been no lower than 1,100. Right now, it’s about 1,250.

   At least one of MF Global’s creditors has already recovered money it’s owed. That creditor happens to be JPMorgan Chase.

While investors await word on a “missing” $1.2 billion, the Commodity Futures Trading Commission is reviewing an email chain that refers to a transfer of money to JPM on Oct. 28… the last business day before MF Global’s bankruptcy filing.

“The roughly $200 million that JPMorgan Chase received,” according to The New York Times, “is said to be entirely customer money.”

Isn’t that nice?

   “[JP Morgan] wears way too many hats in this situation,” says James Koutoulas, a lawyer representing 8,000 MF Global customers.

“They were a custodian of customer segregated funds, they were a primary lender to MF Global… they were head of the creditors’ committee in bankruptcy court, they’re buying customer claims for pennies on the dollar — vulture claims, and it appears that they just may have gotten favorable treatment by purchasing [London Metal Exchange] stock from MF Global… as well as buying these sovereign debt positions that have turned out to be profitable trades.”

Koutoulas is demanding the bankruptcy judge handling the case look into three issues…

  • Why was JPM able buy MF Global bonds at a discount, with no open bidding process?
  • Why does it appear JPM sold the bonds without disclosure to the court or the trustee winding down MF Global?
  • What special favors did JPM get from the Fed to get priority treatment over segregated customer accounts?

Until those questions are answered, Koutoulas is calling on the futures industry to boycott JPM.

   Gold is retreating toward the $1,600 level. At last check, the spot price was $1,607. Silver’s down to $29.23.

The moves come despite a whiff of dollar weakness. The dollar index is back below 80 this morning.

   “Shockingly different” is how The Wall Street Journal describes Rep. Ron Paul’s approach to asset allocation.

Every member of Congress files a financial disclosure statement… and although we’ve mentioned Paul’s preference for gold stocks before, a few interesting details emerge from the latest one. Of a total portfolio valued between $2.44-5.46 million…

  • 0% is in bonds or bond funds
  • Less than 1% is in stocks or stock funds… and those are actually shorts, including a double-inverse fund
  • 14% is in cash
  • 21% is in real estate
  • 64% is in precious metals mining stocks.

The mining-stock portfolio features 26 holdings. Ten of them are clearly in the “junior” category with market caps of $500 million or less… and those make up about 5% of the total portfolio.

The Journal trotted out an investment manager named William Bernstein to declare, “This portfolio is a half-step away from a cellar-full of canned goods and 9-mm rounds.” He went on to say, “This portfolio is at great risk” because it’s skewed toward inflation and the gold exposure would be bad news in the event of deflation.

Heh… Mr. Bernstein is obviously unfamiliar with the performance of Homestake Mining and Dome Mines in the deflationary 1930s. A dollar put into Homestake in 1928 turned into $6.76 by 1938.

Gold is, as more than one wag has said, “catastrophe insurance” — and in this case, it’s an all-weather policy. If you’re interested in building a Paul-like portfolio, here’s a good place to begin.

[What about his holdings of physical metal, you wonder? Nothing shows up on the forms. But under House guidelines, it doesn’t appear disclosure is required: “Personal property, if held for investment or the production of income, must be disclosed if it meets the reporting thresholds. Collectibles can include, but are not limited to, works of art, vintage automobiles, stamps, jewelry, precious metals, rare coins and books.”]

   For you, gold might spell opportunity. For most Americans, gold is something they still don’t think about. For Greeks… it spells desperation.

Unemployed Greeks with no means of support and nothing better to do have taken to illegally mining for gold… often guided by nothing more than myths passed down through generations.

“They cite the buried golden sow with its seven golden piglets (which made a poor farmer rich),” according to an Associated Press story, “the coin hoards guarded by dragons from the times of Alexander the Great or the Byzantine emperors, the gold plunder squirreled away by long-dead Turkish pashas or fleeing Nazi officers.”

They almost never find gold… but they do leave behind huge holes to be filled by workers still on a government payroll…

And on the rare occasions they find something, they might run into the same obstacles as the folks at Odyssey Marine. “In 2003,” the AP says, “legitimate treasure seekers unearthed thousands of ancient coins buried near the town of Pella, some 60 miles west of Thessaloniki.”

But they couldn’t keep them, since the coins were considered “antiquities.”

   “$4,155 for gasoline? Nonsense,” a reader asserts after an item we ran upfront on Tuesday.

“Get out your calculator — how many miles a year does the average driver drive each year? I’m a heavy user at 18,000 miles. What’s the average price paid? I use high-test, live in an expensive gas area and still only paid an average of $3.70 per gallon.”

“How many miles to the gallon — well, I get 24, but that’s better than most — but I suspect that the average is about 18 mpg considering the number of hybrids, Civics and Minis.

“So do the math! 18,000 miles at 18 mpg is an even 1,000 gallons @ $3.70/gal is $3,700. You do not have to exaggerate — things are bad enough!”

The 5: Umm… the figures are not per driver. They’re per household. Which we specified. But thank you for playing.

   “Wow! Thank you!” a reader enthuses after we posted a text-only version of Byron King’s “New War” scenario yesterday.

“That is very generous of you and very much appreciated! I have been wanting to study this for months, to explain properly to my children, as it is simply excellent and we don’t find that explanation anywhere.”

   “The U.S. military is in Korea only because they fight the last war,” writes a reader adding to our latest cost-of-empire thread.

“The U.S. Congress reclassified helium as nonstrategic material in 1996, 71 years after it was classified as strategic material and it was stockpiled since at enormous expense. Zeppelins stopped being used about 56 years before the declassification of helium.”

“It is now more than 60 years after the end of the Second World War, and I hope that soon the U.S. will return its occupying forces from Japan, Germany, France, Italy, etc. Leaving Korea will take another 10-20 years. Can someone tell Congress/the president to act on timescales of 10-20 years, and not 60-80 years?”

   “The Social Security problem will be solved,” a reader quips, “once the National Defense Authorization Act is signed into law.”

“The president simply declares that all Social Security recipients might be terrorists…”

   “In reading your discussion of the IRS taxing U.S. citizens abroad, even dual-citizenship holders, I think of my son.”

“He is a U.S. citizen living in Hong Kong working for an American financial company. He first files Hong Kong taxes and then files U.S. taxes with a credit for taxes already paid to Hong Kong. He says he is one of very few U.S. citizens working in Hong Kong, due to the U.S. requirement to pay taxes.”

“Most Western companies there hire Canadian, British or Australian citizens because they are not required to pay their own country taxes and are therefore willing to work for less. Instead, we have U.S. citizens qualified to work for financial companies abroad that are unemployed.”

The 5: No offense, your son is undoubtedly a fine individual… but there’s a category of job few Americans would object to getting outsourced.


Dave Gonigam
The 5 Min. Forecast


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