February 24, 2014
- The elephant in the room in Ukraine
- Washington backs “the Gas Princess” against Russia
- The shortages that weren’t: Byron King on the energy bullet the U.S. dodged
- Frontier markets made easy: Chris Mayer’s one-stop shopping for great companies at the edge of the world
- Checking a reliable recession indicator… the demise of chained CPI… the amazing shrinking army… and more!
“Why hasn’t anyone covered the natural gas angle with Ukraine?” said the email from our executive publisher and 5 founder Addison Wiggin.
Why, indeed? Then again, our fearless leader might be expecting too much from the media. Heh…
As we said on Friday, the media noticed Ukraine only when firebombs ignited in the streets and F-bombs ignited in the mouths of diplomats. It’s undoubtedly too much to ask for something like, you know, context.
But if it’s context you’re looking for, it’s well encapsulated in this map of gas pipelines that send Russian gas through Ukraine and on to western Europe.
“The gas lines are Russia’s main outlet to Western Europe markets,” says our Byron King, our resident expert on both energy and military affairs. “So they’re part of Russia’s cash register.”
Late last year, Ukraine’s now-deposed president Viktor Yanukovych was playing off Russia against the European Union for a bailout. Russia stepped up with $15 billion in cheap gas and loans. The Europeans? They had no gas to offer.
Ukraine’s heavy industry — concentrated in the Russian-speaking east — would shut down in a heartbeat without Russian gas. Guess whose offer Yanukovych took.
The leading lady in Ukraine’s now-victorious opposition has her own intriguing history with natgas.
“You are heroes!” Yulia Tymoshenko told a crowd of admirers on Saturday night — hours after Yanukovych fled the capital and Tymoshenko was sprung from prison.
In the 1990s, communism had fallen and Tymoshenko built a fortune running the state-owned gas monopoly, enough to earn her the nickname “the Gas Princess.” She was thick as thieves with the prime minister at the time, Pavlo Lazarenko… and that’s not just an expression. Lazarenko was convicted in a U.S. court of embezzling $200 million from the Ukraine government, for which he did six years in Club Fed. The indictment named Tymoshenko as an unindicted co-conspirator.
Then she got into politics, eventually becoming deputy prime minister, where she could oversee… the energy sector. In 2005, she became prime minister.
As the rift widened between ethnic Ukrainians in the west of the country and ethnic Russians in the east, she sided against the Russians. She ran for president against Yanukovych in 2010 and lost. The next year, Yanukovych trumped up charges that landed Tymoshenko in prison.
Here too, gas was the issue: “The charge,” writes Christopher Dickey at The Daily Beast, “was that she exceeded her authority as prime minister by signing a new gas deal with Russia in 2009 that the rest of the cabinet opposed.”
Tymoshenko, the Gas Princess…
“Yulia Tymoshenko: She’s No Angel” reads the headline of Dickey’s story. No, but she’s a darling of the bureaucrats in Washington and Brussels who’ve been itching to install a Ukrainian regime hostile to Russia’s president Vladimir Putin.
What’s that old saying about “Be careful what you wish for”?
“The U.S. gas supply might have crashed this past winter,” says our Byron King, turning to the domestic gas situation. “I mean spot shortages all over, and even regional shutoffs.”
The polar vortex isn’t done with us yet. The northern plains are in single digits or even below zero this morning, and the system is heading east. But the worst appears to be over. March natural gas futures are $5.80 this morning. But April’s are only $4.86. “If you believe the traders,” says Byron, “spring will arrive on time.”
Still… he says we dodged a bullet.
Natural gas storage levels are now at 11-year lows. And a cold winter isn’t the only reason. “There are other energy angles at work, too,” Byron tells us. “These have not received much attention in the media, but are worth understanding.”
- Start with a wet fall in the Midwest last year. “Farmers used unexpectedly high levels of natgas to dry crops. We certainly saw that in national-level propane shortages over the past winter. Propane supply simply dried up”
- Then there’s the California drought we’ve mentioned a couple of times in recent weeks. “This drought dramatically reduced water flow and hydropower output from dams out west. What made up the electric difference for people in the Golden State? Natgas-powered generation — and that will continue into the indefinite future, considering California’s lack of rain and snowpack.”
Add those factors to the cold winter and “the national energy system — for natgas and gas-fired electric — was/is heavily stressed,” Byron concludes. “No wonder natgas storage is at such a low level.” Which brings us back to those 11-year lows…
“In the winter of 2003,” Byron reminds us, “gas supply simply wasn’t there when demand hit, and natgas futures spiked upward to nearly $12.
“This winter, despite record cold and other gas demand, gas prices were more restrained. Otherwise, at $12 gas, imagine your monthly heating bill being perhaps three times what you’re paying now. Instead of, say, $300 per month in winter, it would be $1,000. And apply that across millions of households. It’s a big number.
“Or think it through in even bleaker terms. We could have had entire regions of the country suffer severe gas shortages. What if this past winter there were simply not enough gas in the lines? Pipeline and utility managers would have had to start shutting valves to, say, large industrial users. That and more.”
That’s the difference the “shale gale” of the last few years has made. “We dodged a bad bullet. Fate took a shot at us and missed. We were lucky, I suppose. Then again, the harder you work, the luckier you get.”
The investment angle? The best way to profit right now from America’s energy boom isn’t in natgas, says Byron: It’s in oil… for reasons he lays out right here.
“We’re still scrounging for great explanations for this rally,” says the poor sap at MarketWatch whose job is to “live blog” today’s stock market action.
As of this writing, the S&P 500 sits at 1,856. If that holds at the close, it will be a record high. All the major indexes are up at least 1%. No, there’s no awesome economic data or earnings report fueling the rally; it simply is what it is.
Gold is rallying too, though not as strongly, the bid now $1,337. That’s a four-month high.
If you’re looking for a sign of looming recession, you won’t find it the Chicago Fed’s National Activity Index.
This index — drawing on no fewer than 85 economic numbers — has had an uncanny history of predicting all but one recession since 1970. If the index’s three-month average drops below negative 0.7, look out below.
This morning, the number rang in slightly above zero. Nothing to write home about, but the apocalypse is not nigh…
A funny thing is missing from President Obama’s latest budget blueprint.
For the first time in several years, the president is not proposing to index Social Security benefits to a measure of inflation known as “chained CPI.” Chained CPI is a measure of inflation that’s even lower than most of the phony numbers the government puts out. Keying Social Security’s cost-of-living increases to chained CPI would have the effect of trimming future Social Security outlays.
This year, he’s not trying: Liberals never much liked the idea, and conservatives who were keen on it were less keen on the tax increases the president wanted in exchange.
“I had let my guard down,” recalls Chris Mayer of the time he got scammed… and discovered a great investment idea at the same time.
It was his first visit to Vietnam. “When I arrived in Saigon, flying in from Phnom Penh, I went with the first taxi driver who approached me. He had an official-looking laminated card with rates and such. OK, fine.
“Well, when he dropped me off on the street across from my hotel, I knew something was up. The fee was $25, which I paid. But I learned later that that cab fare should’ve been $5. Taxi scams are rife around Saigon’s airport.
“Soon after, I learned about Vinasun — Vietnam Sun Corp. — the largest taxi operator in Vietnam. It is generally honest and reliable. People told me to stick with those cabs because they have meters.
“I also noticed that you needed a taxi in Saigon to go almost anywhere. It’s not a great city for walking. There is the heat and humidity, for one thing, not to mention the pollution. Then there is the chaotic sea of traffic, including an unbelievable number of motorcycles. So I wound up taking a Vinasun cab to almost all of my meetings.
“I also remember looking at Vinasun’s stock. It looked like a great business at a cheap price, but it was hard to buy.”
That’s the rub with all these great companies in “frontier markets” — the emerging markets that haven’t yet emerged. They’re hard to buy with a discount brokerage account.
“I didn’t think much of all this until recently,” says Chris. “I’ve been hearing more and more from my contacts about how Vietnam’s stock market is attractive again.
“I looked up Vinasun, and as it turns out, it was a great investment idea. It’s tripled since I was in Saigon in 2011. Yet it still trades for less than 10 times earnings and enjoys a 20% return on its equity. It has over 4,000 cabs and is expanding into new cities. It is still a fantastic business at a great price.”
Chris recently clued in readers of Mayer’s Special Situations to a one-of-a-kind fund that pulls together dozens of such great companies scattered across frontier markets. The fund jumped 7.3% last month. “That is a remarkable performance considering most emerging markets dropped sharply in January — as did the U.S. market.
“Frontier markets,” he explained, “have low correlation with world markets. Which means if world markets fall, these markets ought to fall less, or may not fall at all.”
“Is China so great now,” a skeptical reader writes after Friday’s episode, “it’s going to take on three major world countries, the USA being one, all at one time, including possibly the U.N.?”
The 5: Well, no. But big ugly wars aren’t always launched on purpose. Sometimes things just get out of hand because an archduke is assassinated in Sarajevo or false radar echoes show up on a ship in the Gulf of Tonkin, no?
“What’s the fuss about?” a reader writes after our issue with email gremlins on Thursday. “I didn’t get The 5 the other day. I just don’t have a problem with that. It is very easy to just log into the website and get your daily fix.
“It has happened on various occasions, I never know if it is my Internet provider or Agora, but hey, I don’t think I have ever missed my daily fix. The 5 is almost as powerful a fix as drugs.”
The 5: After all the analogies we’ve made between the Federal Reserve and a dope dealer over the years, we’re not sure how comfortable we are with that…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “Defense Secretary Chuck Hagel,” says a story just out from The Wall Street Journal, “is proposing a new budget plan designed to turn the military’s attention from the long ground war in Afghanistan toward emerging cyberthreats from China and increasing challenges from al Qaida-affiliated groups in Africa.”
Indeed, the Army is set to be shrunk to its smallest size since 1940 — before World War II. But money for cyberwarfare is protected.
The aforementioned Byron King has spent months identifying small players set to collect the biggest windfalls of Pentagon cybercash — starting less than six weeks from now. You can examine the fruits of his research at this link.