October 15, 2013
- One government agency that’s not shut down — and why that’s a good thing
- The staggering boom in U.S. natural gas, opening up a 48-hour profit possibility
- An “unhinged” stock market, shades of 1937: The world under a Yellen Fed
- The Vatican’s golden blunder… China’s golden lingerie
- Reader joins The 5 in tuning out D.C. noise… China’s real plan for its Treasury holdings… an American Spring?… and more!
At long last — something good to come out of the “17% government shutdown.”
As we noticed last week, the shutdown has stanched the flow of only 17 cents out of every dollar in federal spending.
Many agencies that are still up and running have gone out of their way to make it look as if they’re in dire straits. Consider the website at the Department of Energy.
“DOE’s shutdown plan,” Politico reported at the start of the farce, “says the agency gets lots of funding from multiyear and no-year appropriations — meaning ‘in the immediate future, we expect federal employees to continue to report for work as scheduled.'”
That includes employees in one DOE agency who are on the cusp of a decision that could make nimble investors a lot of money in very little time.
First, the essential background: Check out the price of natural gas since it peaked in the summer of 2008…
You want to talk about the impact of the “fracking” boom in America? It’s not in oil. Oil is at $102 a barrel this morning — down less than one-third from its 2008 peak of $147.
“The real impact from fracking,” veteran energy journalist Jim Norman explains in the current issue of Apogee Advisory, “has been in the U.S. natural gas market, where burgeoning supplies have held down the wholesale cost of that critical industrial fuel to below $4 per thousand cubic feet.
“This has been a major boon to U.S. industrial profits, since energy is one of the biggest input costs and most U.S. industry runs on gas.”
But look at what the rest of the world pays for gas…
Wouldn’t you love to pull $4 gas out of the ground and sell it to Asians for four times as much?
That’s exactly what a growing number of U.S companies are trying to do. But they need Uncle Sam’s permission first.
Barely a month ago, when Dominion Resources won approval to export natural gas, the share price leaped from below $58 to more than $63. A nice run-up… but there was another way to play the move. This method generated a 193% gain… in a mere 48 hours.
The next round of approvals could come literally any day now — shutdown be damned.
“I believe we’ll see two to three more before this coming December,” says an industry insider with more than 30 years of experience. Some 21 companies are in the queue. With the able help of this insider, we’ve had a team of five people hard at work, figuring out who has the inside track.
So there’s the backdrop for the first online live event Agora Financial has ever held — a chance to triple your money in a 48-hour span anytime between now and December. We’ve scheduled the event for 6:00 p.m. EDT Thursday evening. We’ve set aside time for both a comprehensive briefing and Q&A from readers. You can eavesdrop on this briefing absolutely free of charge; all we ask is that you do us the courtesy of signing up in advance.
In case you can’t join us live, the event will be replayed at 9:00 p.m. EDT Thursday.
The major U.S. stock indexes are treading water after squeezing out gains across the board yesterday.
At last check, the S&P was down a little over a point, to 1,709. The Russell 2000 small-cap index touched a record yesterday; as we write, it’s down about five points, to 1,085.
Gold got pummeled overnight to nearly $1,250, but has since recovered to $1,269.
Traders starved for economic data during the shutdown got the Federal Reserve’s Empire State survey this morning. It stunk; after four straight months of expansion, this measure of New York state manufacturing now teeters on the brink of contraction.
In addition to the shutdown-debt ceiling negotiations in Washington, traders are also eyeing no fewer than three Federal Reserve governors giving contradictory speeches today — a custom that might not last much longer. The buzz is that Fed chairwoman-designate Janet Yellen wants everyone singing from the same hymnal, taking “uncertainty” out of the market.
“Janet Yellen is establishment all the way,” says our Chris Mayer, weighing in on the nomination. “She won’t wobble the canoe. She’s not a Paul Volcker coming in to break things up.
“And that’s all you need to know about Yellen. She’s got the same playbook in her pocket as Bernanke. If anything, there are hints she’ll be even more aggressive in printing money than Bernanke.”
Under eight years of Bernanke, the Fed’s balance sheet grew 365%. “It bought all that with money it created out of nothing. My guess is it will be higher still when Yellen leaves.
“Expect the easy money and distortions to continue. The stock market may continue to rise, as it has, with the size of the Fed’s holdings. This can’t end well, but the party between now and the end could be something.”
“Already, the markets have come unhinged,” Chris adds.
For evidence, look no further than the market for initial public offerings (IPOs). Out of 28 new technology stocks listed this year, 19 are losing money.
Or look at Salesforce.com, Workday, Netflix — even Amazon. Where are the profits? Chris cites a recent note by Murray Stahl of the Horizon Kinetics research firm: “If it is possible to be successful without generating profits [but] merely by growing revenues, why should not more companies engage in that approach?”
On the flip side, companies like IBM, Microsoft and Apple have huge profit margins, and they look cheap based on recent earnings. “But those recent earnings,” Chris says, “come from reaping the rewards of high profit margins. There is a big risk that these will revert to something less heroic.”
“Yellen is a central banker straight out of central casting,” chimes in Dan Amoss: “a model-wielding economics Ph.D. and former White House adviser with no real-world experience.
“Yellen believes in the healing power of money printing. She is said to attend Fed meetings armed with ‘lots of data.’ That’s great; lots of data usually mean more overconfidence in flawed policy proposals — including her highly destructive statement a few years ago that she’d vote for negative interest rates.
“We will see several more years of Bernanke-style policies; only Yellen’s policies would be even more reckless.”
“There is a lot of downside once investor faith in the Fed is shaken,” Dan adds. “If it’s shaken and expectations for rising inflation or tight money take hold, the downside to stocks could be dramatic.”
Dan spotted an eye-opener of a chart from Barry Bannister of Stifel Nicolaus. There’s a lot going on in here, but basically, it takes the market rally from its Great Depression bottom in 1932… and overlays it with the rally that began in 2009. Look closely: Where the green line ends, “You are here”…
“The PR machine in the financial press says Yellen is not really as dovish as she’s perceived,” Dan goes on. “Well, she could try tapering QE in 2014, risking a 1937-style market crash, and quickly reverse course.
“She’d discover how addicted the financial system is to QE: It’s built up a tolerance to ever-stronger doses of monetary drugs. It needs the cash to keep flowing just to remain aloft and maintain the money illusion that’s captivated investors. Cutting off and reversing QE would abruptly push the market back to pre-QE levels.”
Memo to the Vatican: Find someone other than the Italian State Mint to make your gold medals.
The Vatican commissioned thousands of gold, silver and bronze medals to commemorate the first anniversary of Pope Francis’ pontificate next year. Unfortunately, a Latin inscription around the edge that was supposed to read “Jesus” instead read “Lesus.”
The medals actually went on sale in official Vatican stores a week ago today, but were withdrawn when the error was spotted two days later.
Four people bought the botched medals; they should become quite the collectors’ item.
And now from China, some absolutely random gold eye candy…
That’s $665,000 worth of gold underwear and accessories proudly displayed at an expo in Chongqing.
“Inventory of gold-colored everything has been spotted all over China,” says a puff piece at the International Business Times. “China is going crazy for gold. Not only for the actual precious metal, but also for anything and everything that can be gilded, like phones, cars and even bathtubs.”
Evidently, the IBT has only now discovered the “love trade” for gold in Asian cultures that Frank Holmes has been patiently explaining to 5 readers for years…
“Dave, you’re right,” a reader gets today’s mailbag off on the right foot, “the D.C. noise has made me just tune it out.
“I have been reading my daily dose of The 5 and saw the China warning again, which is the only thing that is making sense of this whole ordeal. The rest of the world will be falling in line soon enough and then there goes the U.S. dollar’s reserve currency status.
“Don’t our lawmakers get it? Financial advisories everywhere are basically saying what The 5 has said for some time now. This just doesn’t end well. It’s like drunks with a never-ending pocketbook. Oh, and it’s yours and my money and, unfortunately, our kids’ and their kids’. Shameful!
“Well, good for the Chinese. I’d be doing the exact same thing they are doing. Sell our bonds, which they have trillions of, and buy gold. Those bonds, within time, will be worthless, and good old tried-and-true gold will hold monetary value.
“Thank goodness my wife is Chinese. We will at least be able to communicate with them. Always enjoy The 5.”
“I was thinking back,” writes another reader, “to when Obama bailed out the car industry and forced losses on GM bondholders and gave a share of the new stock to union workers because they had worked for GM so long.
“Obama did not respect the efforts of bondholders to save their money and let GM use it. If the USA starts defaulting on our $16 trillion, who will be awarded money, with all the contrasting interests at stake?
“Will we pay for child care before interest payments to China? Obama’s history of solving these problems would leave China one of the last to get anything. How soon do you think they will liquidate?”
The 5: As we said on Friday, the Chinese can’t “liquidate” without upending global markets and destroying the value of their other U.S. assets.
But as Jim Rickards wrote in Currency Wars, they don’t have to liquidate. “Treasury securities are sold in many maturities, ranging from 30 days to 30 years. The Chinese could shift the mix of their Treasury holdings from longer to shorter maturities without selling a single bond and without reducing their total holdings. As each long-term note matures, China could reinvest in three-month instruments without reducing its total investment in Treasuries.
“These shorter maturities are less volatile, meaning the Chinese would be less vulnerable to market shocks. This shift would also make the Chinese portfolio more liquid, vastly facilitating a full Chinese exit from Treasury securities. The Chinese would not have to dump anything but merely wait the six months or so it takes the new notes to mature.
“The effect is like shortening the time on a detonator.” Kaboom.
“What we the people need,” writes an expat reader who still minds events back home, “is a sustained, grass-roots effort to get ourselves a whole new Congress.
“Perhaps at some point, the people of the U.S. will become responsive, if not active, in the American version of an Arab Spring. If this happens real soon, then I guess it might be called the American Fall?”
The 5: From where we sit, there’ve been two early and encouraging signs in the last three months. In July, the House nearly voted to defund the NSA’s bulk collection of phone records. The vote united tea partiers and progressives — failing by only 12 votes.
In September, the public opposition to a war in Syria was so overwhelming Congress never even bothered to vote.
Then again, we recall that phone calls to Capitol Hill when the bank bailouts were being debated five years ago ran 100 to 1 against. We know how that one turned out…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Daily Reckoning contributor Avik Roy has unearthed a huge reason the Obamacare website has been such a disaster.
“Healthcare.gov forces you to create an account and enter detailed personal information before you can start shopping,” he writes. “HHS bureaucrats knew this would make the website run more slowly. But they were more afraid that letting people see the underlying cost of Obamacare’s insurance plans would scare people away.”
Another round of provisions in the law kick in Jan. 1, shutdown or no. Are you ready?