January 30, 2014
- Imagine the movie-announcer voice: “In a world of $700 oil…”
- Not the usual “January effect”: Guenthner takes the market’s pulse
- Fed hubris, Yellen edition: Brace for “optimal control” and “communications policy”
- A triple play of mediocre numbers… doofus diligence… readers weigh in on what MyRA portends for the future… and more!
“Last week, the price of energy hit the equivalent of $700 per barrel,” says our Byron King.
No, it didn’t get a “Drudge siren.” The number was absent from CNBC’s ticker. Bill O’Reilly missed another chance to fulminate against Big Oil.
But supply and demand quietly did its thing…
Our story begins a week ago Tuesday as another polar vortex swept its way south: “While Americans pulled energy from every nook and cranny of different grids,” says Byron, “Maryland’s Calvert Cliffs Nuclear Power Plant shut down. The problem was a non-nuclear electric malfunction, according to a Calvert spokesperson. Specifically, snow and ice formed over a ventilation louver. Over time, loss of cooling air tripped a circuit breaker. Calvert Cliffs went offline.”
We didn’t notice a thing here in Baltimore. Nor did anyone else. “The good news is that when Calvert Cliffs went down, other conventional fuel power stations in the region fired up to replace the lost nuclear power.”
“The bad news is that the other power plants burn natural gas,” Byron goes on.
“The unanticipated demand for large volumes of natural gas to power electric generators — in the midst of a brutally cold winter heating season — sent prices for immediate delivery (known as the spot price) to a stunning level of $120 per 1,000 cubic feet (mcf) in some markets. By way of comparison, that price for gas is equivalent to an oil price over $700 per barrel.
“Utility companies had a choice. Pay $120 per mcf or not have the gas with which to generate electricity. When you need it now, sometimes you pay the price for urgency.”
A one-off incident like that doesn’t get reflected in a chart of the broad natgas market. And Calvert Cliffs went back online last weekend. But even this morning, March natgas futures are fetching $5.40 per mcf — levels last seen nearly four years ago…
“Natural gas usage is way up across the U.S. and Canada,” Byron says. “Storage caverns in the Northeast are remarkably depleted for so early in the heating season.
“Meanwhile, there’s not remotely enough interstate pipeline capacity to meet demand. That’s why we see massive gas withdrawals from storage, to heat homes and businesses as well as generate electric power. Plus, compounding the problem, there’s news of freeze-ups in the gas fields of Pennsylvania and as far south as Arkansas. Whoops.
“Over time,” Byron concludes, “gas prices will adjust downward, in all likelihood. Still, we’re continually learning how markets adjust rapidly and abruptly to unforeseen events, like the super-cold winter — not to mention losing a major energy asset like Calvert Cliffs, even for just a short time. Be prepared for strange things moving ahead.”
“Everyone wants to know if we’re going to have a tough trading year,” says The Rude Awakening’s Greg Guenthner.
The major indexes are all in the green this morning after another sell-off yesterday. The S&P sits at 1,790. January is shaping up to be about a 4%-down month. All but one of the S&P’s 10 sectors are losers…
So… back to Greg’s question: “I have no idea. If I did know, I wouldn’t be writing to you this morning (no offense). Instead, I’d be watching the sun rise on my private island in parts unknown.”
These trend followers — they’re militant in their agnosticism. Heh…
“We can’t predict with certainty whether or not the emerging market troubles we’ve experienced this month will infect U.S. stocks to the point of crisis,” Greg explains with more honesty than anyone who infests financial TV. “This exercise is futile.
“Your mission is much simpler. Rather than act on wild guesses, you need to react to what the market tells you. If you’re trading this market, lighten up your exposure and don’t lean too far bullish or too far bearish.”
[Ed. Note: This morning, Greg told his paying subscribers to unload the natural gas position he recommended laying on a week ago today. Good for an 11% gain in five trading days. You can start getting access to Greg’s daily trading guidance for as little as $5.]
“Central planning failed for Stalin and Mao Zedong, and it will fail for Janet Yellen too,” says a pithy Op-Ed by Currency Wars author Jim Rickards.
Ben Bernanke presided over his last Federal Reserve meeting this week before Yellen takes over. At the conclusion of that meeting yesterday, the Fed opted to “taper” its quantitative easing/money printing by another $10 billion in February, to $65 billion per month. With a little help from our old friend the tapir, we’ve illustrated the process thus…
As for Ms. Yellen and her penchant for central planning, “Yellen’s greatest deficiency is that she does not use practical rules,” Mr. Rickards writes in his hometown paper, The Darien (Conn.) Times. “Instead, she uses esoteric economic models that do not correspond to reality.”
Worse, she gives them names like “optimal control” and “communications policy.”
“The theory of optimal control says that conventional monetary rules,” writes Mr. Rickards, “should be abandoned in current conditions in favor of a policy that will keep rates lower longer than otherwise. Yellen favors use of communications policy to let individuals and markets know the Fed’s intentions under optimal control.”
Oh, joy and rapture…
“The idea is that over time, individuals will ‘get the message’ and begin to make borrowing, investment and spending decisions based on the promise of lower rates. This will then lead to increased aggregate demand, higher employment and stronger economic growth. At that point, the Fed can begin to withdraw policy support in order to prevent an outbreak of inflation.”
That’s the theory. Here’s the reality: “The Fed is trying to tip the psychology of the consumer toward spending through its communication policy and low rates. This is extremely difficult to do in the short run.
“But once you change the psychology, it is extremely difficult to change it back again. If the Fed succeeds in raising inflationary expectations, those expectations may quickly get out of control, as they did in the 1970s. This means that instead of inflation leveling off at 3%, inflation may quickly jump to 7% or higher. The Fed believes they can dial down the thermostat if this happens, but they will discover that the psychology is not easy to reverse, and inflation will run out of control.”
Speaking of “esoteric economic models that do not correspond to reality,” the GDP numbers are out this morning.
The Commerce Department deduces that “the economy” grew in the fourth quarter at an annualized 3.2% rate. For all of 2013, it works out to 1.9%. That’s anemic even if you think GDP is worth a hill of beans — which, as a reminder if you’re new to The 5, we don’t.
Elsewhere this morning, first-time unemployment claims rang in worse than expected last week, at 348,000… and pending home sales sank 8.7%, when the “expert consensus” was counting on a blip down of only half a percent. Oops…
Gold drifted down overnight and dropped like a stone shortly before the Comex open in New York this morning.
This time, $1,250 isn’t holding: At last check, the bid is $1,244. Silver’s down 2.5%, to $19.23.
And now a third case of “investors” performing doofus diligence.
It was silly enough in November when shortly before Twitter’s IPO, investors piled into TWTR Inc. — a bankrupt outfit that ran the Tweeter chain of electronics stores. Shares leaped 700%.
Then earlier this month, Google announced it was buying a thermostat maker called Nest Labs. Never mind that Nest was privately held; investors piled into the traffic systems firm Nestor Inc. — which has the symbol NEST. Good for a 4,900% ramp!
But yesterday takes the cake. After the president unveiled his vaunted “MyRA” investment accounts during the State of the Union, shares in Myriad Entertainment & Resorts — ticker MYRA, natch — raced up 900%.
MYRA, a resort operator, was delisted from the exchanges more than four years ago after it stopped filing 10Q forms with the Securities and Exchange Commission.
After leaping to 0.10 cents intraday yesterday, it’s back to 0.01 cents. Looking at the chart, we see a huge spike in volume on Jan. 17.
Hmmm…
“The MyRA sounds like a nice program,” a reader writes as long as we’re on the subject, “but has an insidious consequence for the American people.
“All this program does is replace the Fed with the American people as the buyer of our nation’s debt. And guess who will be left holding the bag when it all collapses around us? Not the government, but us. Instead of being taxed twice, we are taxed twice and forced at the point of a gun to buy something we don’t want in the name of helping us save for the future.
“Let me take care of my retirement. As a matter of fact, why don’t you and the rest of the Washington crowd just get out of our way? We will clean up the mess you guys made, as usual.”
“Wow!” adds one of our regulars. “So in sum, this is just the Fabian socialist way of doing 401(k) confiscations to fund a bankrupt government; but rather than forcing people to do so, causing a lot of social sturm und drang, people will ‘willingly’ line up to buy that, um… papier hygienique that passes for gov’t bonds.
“As diabolically brilliant as a Katy Perry paean to the devil.”
“Don’t we already have a mandatory retirement program in the U.S.?” a reader echoes a fellow reader yesterday. “I think it’s called Social Security or something like that.
“So what happens down the road when Congress wants to tap the MyRA millions for special interests projects and social(ist) reforms?
“Mandatory retirement, mandatory health insurance… pretty soon they’ll be talking about mandatory meal plans, mandatory transportation funds, mandatory entertainment till there’s no money left from the average worker’s paycheck. Maybe the smart ones are grandfathering onto the mandatory government assistance rolls while they still can.
“Maybe Ayn Rand wasn’t so far off after all.”
“Learned something new today, and it made something click,” another reader writes.
(That always makes us feel good.)
“BlackRock is the one company managing funds in the TSP (Thrift Savings Plan) for all gov’t workers (including the military). Them getting access to even more money sounds a little fishy. OK, very fishy. Please continue to track this development and let everyone know where it might be headed.”
The 5: Hmmm… From the TSP website: “The Federal Retirement Thrift Investment Board currently contracts BlackRock Institutional Trust Co., N.A. (BlackRock) to manage the F, C, S, and I fund assets.”
The G Fund of Treasuries is self-managed. So it’s a tossup whether BlackRock gets its hands on the MyRA investments.
“I like the ‘Australian Solution,'” a reader writes.
We never cease to be surprised…
“It makes sense that everyone should put money away for retirement, money that employers can’t raid or take with them when they move overseas. This retirement ‘crisis’ has been caused by just such traitor corps. Yes, there was a time I recall that lasted over three decades, when Americans socked funds away enough to retire. But companies can’t be trusted to contribute or even protect workers’ future stake in enterprise, so enter Uncle Sam.
“And by all means, do invest those funds in the U.S. stock market, because patriotism begins at home, and traitor globalist investors should be shot by firing squads.”
The 5: Really? You want the government to take a cut of everyone’s paycheck and put it in stocks. Which stocks meet your rigorous “patriotic” standards, exactly? The typical S&P 500 firm now gets 40% of its profit from overseas.
“The contributions toward Australia’s superannuation retirement plan do not come out of employees’ pay packets,” a reader Down Under tries to correct. “They are paid directly by the employer into funds nominated by the employee.
“Then the fund managers invest the funds, mainly into the stock market, after taking out their cut. Without this legislation, workers would save nothing for retirement.
“It is a good thing that the funds cannot be withdrawn until retirement.”
The 5: Oy.
It might not show up on a pay stub, but we assure you the cost of contributing to a retirement plan… and a health plan… and unemployment insurance… all figure into an employer’s calculus when deciding how many people to hire and how much to pay them.
Here in the states, it’s actually illegal to itemize unemployment insurance on a pay stub, lest the employee get the idea that maybe he’d rather not make such a “contribution” if given a choice.
But hey, it’s all “for your own good,” right?
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. While we’re on the subject of benefits paid by employers…
“Employers today are frustrated by the cost and hassle of providing health insurance, so they are looking for an affordable alternative to keep their employees healthy,” says Ceci Connolly of PwC’s Health Research Institute.
The “affordable alternative” she has in mind is Obamacare.
Thus, according to an NBC News account, “the Obamacare exchanges may be an appealing option for employers looking to provide enticing but affordable benefits to their workers.”
Yep, it’s not just the 6 million saps in the individual market losing their coverage; the big wave of many more millions who get insurance through their job is coming later this year.
If you think Obamacare won’t affect you, think again… and start taking action now.