America’s Shale Boom “Canceled”

June 19, 2014

  • A Babylonian mind-bender…
  • How all-out war in Iraq could negate America’s oil boom
  • Wrong models, wrong results: Stockman and Rickards on the Fed’s woeful forecasting record
  • Broad market sets new highs, but one sector is scorching the S&P
  • The stupidest app ever (but what do we know?)… income versus net worth… the black market and the “fair tax”… and more!

  We start off on this Thursday the same way we did on Monday — trying to unravel a Babylonian conundrum…

The president says he doesn’t need congressional approval to go back to war in Iraq because the 2002 authorization to use military force (AUMF) is still in effect. This is the same AUMF the president was pushing Congress to repeal earlier this year because, you know, the war was over.

Meanwhile, the president has signaled he wants Iraqi Prime Minister Nouri al-Maliki gone, because he’s an ineffective leader, never mind Maliki’s party was the clear winner this year in one of those purple-finger elections American politicians are so proud of.

It’s enough to induce brain-lock…

  “The disintegration of Iraq is far from over. The situation will deteriorate further, putting upward pressure on oil prices,” writes The Death of Money author Jim Rickards at his hometown newspaper, the Darien, Conn. Times. As we write, West Texas Intermediate crude remains barely a dollar off its highs on Tuesday, at $105.86.

“The ISIS-Sunni drive to Baghdad has been temporarily slowed due to the Shiite call to arms, and Iranian intervention on the side of Shiites and the al-Maliki government,” Rickards continues. “ISIS sensibly is regrouping and consolidating gains while awaiting further aid from its Saudi sponsors. All of this is a prelude to much larger battles to come…

“Turkey may be drawn in by the emergence of a Kurdish state in northern Iraq. Iran has already been drawn in to support al-Maliki. Syria and Iraq have effectively been partly merged because the border has been erased… None of these developments will be resolved soon, so the regionalization of the conflict will proceed with negative implications for regional energy supplies.”

   “Iraq was — emphasis on ‘was’ — producing about 3 million barrels of oil per day,” our Byron King reminds us.

“That’s about the entire ‘extra’ American output made possible by fracking over the past five years or so.”

Not all of Iraq’s oil supply is offline. Yet. “But in one fell swoop,” says Byron, “five years of increases in U.S. oil output can ‘go away.’ Or at least enough for world supply to feel the pinch.”

Yesterday brought headlines that $120 oil is the “danger point” for the global economy. At last check this morning, a barrel of Brent crude — the global benchmark — is fetching $114.77.

“We’re so lucky,” says Byron, “that we’ve been doing this fracking thing for the past five years.” To make the point, his email had 14 O’s in the word “so.”

Which brings us to the latest winner bagged by Byron and his compatriot Matt Insley of our energy team. Yesterday, they closed out a play on America’s shale energy bounty for a 91% gain in only 28 days. That’s very similar to the 100% gain in 36 days their readers bagged earlier this year.

To celebrate, we’re looking for 100 more people today who’d like to repeat that double-your-money-in-36-days performance. Let Matt show you how you can get started only 10 days from now… and perhaps double your money by early August. See for yourself, right at this link.

   Stocks are flat this morning after Fed chief Janet Yellen said all the right things yesterday to send the S&P 500 to new all-time highs. As we write, the S&P sits at 1,949. Lest we neglect events north of the border, Canada’s TSX also set a record yesterday.

Gold popped this morning for no obvious reason and sits within $5 of $1,300… while silver has surpassed $20.

But the Fed did take some wind out of the greenback’s sails; the dollar index has slipped in the last 24 hours, from 80.6 to 80.2. The index’s major component, the euro, sits at $1.364.

Traders are chewing on a mixed bag of economic numbers…

  • First-time unemployment claims: 312,000 last week. Still doesn’t look like a “normal” recovery…
  • Philly Fed survey: This measure of mid-Atlantic manufacturing registered the strongest all year
  • Leading Economic Index: This stew of 10 indicators cooked up by the Conference Board notched its fourth straight increase. Unfortunately, it’s still at a lower level than it was early during the “official” recession from 2007-09…

  “The Fed’s so-called DSGE model should be smashed into bits and dumped into the dustbin of history,” says former White House budget chief David Stockman.

The full name is “dynamic stochastic general equilibrium.” What that term means doesn’t matter as much for our purposes today as the fact the model doesn’t work.

As part of its dog and pony show yesterday, the Fed yet again revised its forecast for GDP growth in 2014. In March, it was looking for 2.9%. Now it’s only 2.2%, thanks to — you guessed it — rough winter weather.

“The Fed is a dictatorship of dangerous Kool-Aid drinkers,” Mr. Stockman writes at his Contra Corner site. “To every question about obvious structural failures in the U.S. economy… Yellen had a ritualistic response: All the bad stuff is due to the fact that the cyclical path of the U.S. economy has fallen short of the DSGE prediction for five years running, but all those failures will automatically fix themselves once the economy gets back on the Fed’s perpetually limp hockey stick!”

Or as the aforementioned Jim Rickards put it yesterday as he live-tweeted Yellen’s news conference…

“If you have the wrong model,” he told us over dinner here in Baltimore last month, “you’re going to get the wrong result every time.” [Ed. note: Readers of Apogee Advisory will get a full dose of Mr. Rickards later today in the new issue, complete with answers to questions reporters dare not ask him during his many media appearances…]

  So then what sent the S&P to all-time highs exactly? Yellen figured out the right script.

Recall during her first news conference in March, she was criticized for having “stumbled” when reporters asked how soon the Fed would start raising the fed funds rate once its quantitative easing/money printing program was wound down. She said a “considerable time.” Pressed to be more specific, she said “about six months”… and the Dow tanked 100 points in mere moments.

Earlier this spring, we suggested Yellen’s critics were too hard on her — what else was she going to say?

She could have told the truth: “I can’t tell you when we’ll make that call. It all depends on the economic data and whether they meet certain thresholds. And frankly, those thresholds might change another six or 12 months down the line, depending on other variables, and I can’t tell you what those variables might be right now. In fact, even the kind of data we find relevant now might be less relevant in another six or 12 months; we might find other data more relevant by then.”

But the truth would have ignited full-out market panic because the obvious takeaway would be, “These people have no idea what the hell they’re doing!”

So what did Yellen actually say? It was a bravura performance. We were truly impressed. Pushed yet again to identify what a “considerable time” would be, she said: “There is no mechanical formula whatsoever for what a considerable time means. The answer as to what it means is: It depends. It depends on how the economy progresses.”

Think about it: She conceded they were making it up as they go along… while still projecting an air of Harvard Business School it’s-all-under-control authority. Simply brilliant.

  Tapering? That’s practically an afterthought. But for the record, the Fed decided to dial back its bond purchases yet again.

From a starting point of $85 billion last December, the Fed has “tapered” in $10 billion increments at every meeting since. Come next month, the monthly purchases will total $35 billion, as our friend the tapir shows…

  “It looks like everyone who sold in May is back from vacation early, thanks to some dovish comments from the Fed,” says Greg Guenthner of our trading desk — steering our gaze back to the markets.

“It’s great news for momentum traders who had to endure relentless selling earlier this year.” Indeed, Greg told his readers earlier this week that some of the “mo-mo” names were coming back to life — first biotechs, then 3-D printing plays. “Now it’s time,” he says, “to begin rooting through another group of beaten-down momentum names: social media stocks.

“I really don’t care what you think of these companies. I don’t want to debate the merits of any ridiculous phone apps or crazy buyout deals. The reality of the situation is that these stocks have snapped back to life.

“Social media shares,” Greg says, “have put in a ‘V’ bottom, sprinting off their lows to offer alert traders quick gains.” Some are already once again overextended, so Greg advises looking at recent IPOs that have retreated to their IPO price. “That could be your ticket to quick gains.”

   Staying with the subject of social media… clearly, your editor missed his calling with this newsletter thing.

A messaging app called Yo has raised $1 million in venture funding. What does it do?

Here’s its description in the iTunes store: “Yo is a single-tap zero-character communication tool. Yo is everything and anything, it all depends on you, the recipient and the time of the Yo.”

Huh? “Here’s how it works,” says CNN Money, “according to the app’s how-to lesson: ‘Wanna say “Good morning” to friends? JUST YO THEM. Wanna say “Thinking ’bout you” to your love? JUST YO. Wanna say “Are you up?” YO.'”

Yes, the only message this “messaging app” is capable of sending is “Yo.”

Of course, we’re fuddy-duddies here. “It’s not just an app that says Yo. It’s a whole new means of communication,” creator Or Arbel tells the Financial Times.

Right. It’s surely as significant a breakthrough in human development as the early hominids discovering how to fashion crude weapons, like the opening scene of 2001: A Space Odyssey.

Well, can 50,000 users be wrong? They’ve already sent 4 million messages…

   “The idea that salary level has anything to do with being rich is bogus,” writes a reader who takes issue with a survey we cited yesterday, the one that shows how different people define “rich” differently.

“As a banker friend once said, ‘I don’t care how much you make. I care how much you have in the bank.’ He was, of course, talking about net worth. If you make $150,000 a year and spend $180,000, your net worth is a negative number. Then there is the old entrepreneurial axiom ‘Nobody ever got rich working for someone else.’ Unless you work for the likes of Goldman, et al.”

The 5: Indeed, it would be interesting to see how people define “rich” in terms of net worth. But we suspect it’s not as easy a question for pollsters to ask. Do you include primary residence in the total? Funds in tax-advantaged retirement accounts?

It gets messy, so we understand why the pollsters took the easy way out…

   “About the drug trade and prostitution,” a reader writes after we discussed how they could goose America’s GDP numbers: “It may be true that any discussion about those trades versus GDP is irrelevant.

“However, it is possible to make a VERY powerful argument about how those trades could impact the tax system. There is a HUGE black market in income. If it is true that only 50% of Americans pay taxes, it is partially due to the fact that there are so many jobs where people deal only in cash — the drug trade, prostitutes, lawn care workers, day care workers,
et al.

“How many of these people who deal only in cash are on food stamps while earning in the high five or six figures? And getting other government benefits as well? These people pay nothing in taxes, yet they buy stuff.

“Consequently, the argument could be made that the income tax could be eliminated while
implementing a use tax or fair tax instead. This would instantly even the playing field
— or at least make it a lot more level than it is today. With a fair tax or usage tax, all of these black-market earners would have to pay taxes like the rest of us anytime they bought stuff.”

The 5: We admire the tenacity of the fair-tax crowd. Touch on any subject under the sun and they can bring it around to their pet project…


Dave Gonigam
The 5 Min. Forecast

P.S. We could get tied up in knots debating tax policy. But we’d much rather help you figure out how to trim Uncle Sam’s take. One of our favorite ideas is right here.


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