June 25, 2014
- Wall Street Journal wrings hands over oil exports and “ultralight” crude: Our energy team sets the record straight
- The amazing shrinking U.S. economy: Official numbers tell only half the story
- Harvard endowment’s underperformance revisited… warning alarm for pensions
- Profiting from the “gluten-free” trend
- Cuss out your boss, keep your job… lower demand for the dollar… the tired old “education and training” solution… and more!
Good problems to have, Part 1: “The Obama administration cleared the way for the first exports of unrefined American oil in nearly four decades,” says the front page of this morning’s Wall Street Journal.
The Commerce Department opened the door barely a crack: It gave the go-ahead to Pioneer Natural Resources and Enterprise Products Partners to ship small amounts of “condensate” to foreign buyers. Condensate is gas trapped underground that turns to liquid on the surface.
American firms are allowed to export refined product — gasoline, diesel, jet fuel — but ever since the “oil shock” of 1973-74, crude exports have been off-limits.
The problem is there’s not enough U.S. refinery capacity to handle condensate right now. “We’re exporting product that we can’t refine economically,” says our resident oil field geologist Byron King. Condensate prices fetch $10 a barrel less than traditional crude.
“I don’t think we’re going to see a lifting of the crude export ban,” ventures Matt Insley of our energy desk.
“We already export millions of barrels per day of petroleum products. And there are several projects lining up right now in Texas that can take light shale oil and ‘split’ it. Basically, it’s altering the hydrocarbons just slightly. Once you do that simple ‘split,’ the crude is considered a refined product.”
Good problems to have, Part 2: “Millions of barrels of crude oil flowing from shale formations around the country,” says The Wall Street Journal in an energy two-fer, “are full of volatile gases that make it tricky to transport and to process into fuel.”
“Ultralight” oil, it’s called. Here too, condensate is part of the mix. “It’s not what we expected to have in our Houston refineries,” says Matt Insley. “That’s a fact.
“We thought heavy sour crude was coming from the Middle East. Instead, we’re getting light sweet from North Dakota, Colorado and Texas. This isn’t a ‘bad’ situation. It’s a different situation. Just like the pipelines and infrastructure needed to be developed to move this oil, focused and efficient refining techniques will also need to evolve.”
“This is hardly news to people who work in the field,” Byron King adds. “The rail industry and government regulators are aware of the problem too. Indeed, about two-thirds of existing oil tank cars are technically unsuitable for transporting gassy oil.
“Investment point here: Rail car builders like Trinity Industries (TRN) have long order books ahead, just on this alone.”
[Ed. note: No doubt the revived U.S. energy industry will find ways to adapt to any challenges posed by ultralight oil. Eight days ago, North Dakota crossed the 1 million-barrel-a-day barrier. An elite Byron and Matt are staying on top of an ever-shifting landscape — to the great benefit of their premium subscribers, who’ve bagged gains this month of…
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Again, that’s just this month.
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Crude prices are steady this morning despite word from Iraq that the berserkers from ISIS are trying to encircle Baghdad.
“The picture is no longer scary,” a spokesman for the autonomous Kurdish government in the north tells McClatchy Newspapers. “It has become close to a nightmare scenario.”
But for the moment, a barrel of West Texas Intermediate fetches $106.21. The price has changed little in the last 48 hours.
Stocks are drifting up mysteriously this morning — as mysteriously as they tumbled after we hit the “send” button yesterday.
At last check, the Dow has recovered about half of yesterday’s losses, at 16,870. Clearly, traders are shrugging off the big economic number of the morning — which stunk to high heaven.
“This morning’s Q1 GDP revision might have been a wake-up call,” writes former White House budget chief David Stockman — but it wasn’t.
The Commerce Department weighed in with its third and final estimate of GDP in the first quarter. It slumped an annualized 2.9% — worse than the most pessimistic guess among dozens of economists polled by Bloomberg. Indeed, it’s the weakest number since the ugly days of early 2009.
Mr. Stockman nearly spit out his coffee upon seeing mainstream media coverage suggesting that on the present trajectory, GDP in 2014 will fail to equal “the U.S. economy’s longer-term growth rate of just over 3%.”
“Well, here’s real GDP since the turn of the century,” says Mr. Stockman. “The average real growth rate is about 1.8% — barely half the cited figure.
“In fact, the 3% potential GDP growth narrative is mocked by the fundamental arithmetic of true economic growth — which is to say, labor hour gains and capital investment.” [Ed. note: We’re heartened to see Mr. Stockman questioning GDP’s relevance as an economic metric, much as we do here in The 5.]
“During 2013, the private business economy generated 194 billion labor hours — the same figure as 1998. Likewise, real investment in productive plant and equipment assets since 2000 has barely inched forward at a 0.8% annual rate — or by less than 30% of its pre-2000 trend rate.” Yuck…
Gold is floating higher and putting $1,300 further in the rearview. At last check, the bid was up to $1,324.
Gee, maybe it’s not “Ivy envy” after all.
That’s what we suggested last week when we noticed three managers of Harvard University’s endowment either resigned or “got quit” after delivering subpar performance. Harvard’s portfolio has posted average annual gains of 1.7% from 2008-13, while other Ivy League schools have done substantially better.
That said, Yale has significantly underperformed the S&P 500 the last three years. Outside the Ivy League, Stanford’s in the same boat. As with most university endowments. And corporate pension funds too. They all piled into “alternative investments” like hedge funds, private equity and venture capital.
A poll by Commonfund finds only 16% of a typical college endowment invested in stocks last year — down from 32% a decade earlier. Meanwhile, exposure to alternative investments has blown up from 33% a decade ago to 53% now.
“That goes a long way toward explaining the woeful underperformance,” quips money manager and blogger Barry Ritholtz, who’s long chronicled the problematic performance at many hedge funds.
“But the real trouble comes at public pension funds,” he adds. “The higher expected returns — based as they are on wishes and gossamer dreams — allow states to contribute that much less to their public employees pensions and retirement accounts.”
“The latest diet craze in the U.S. seems to be ‘gluten-free,'” muses our Chris Mayer — who has a way to play it for profit.
“Gluten is a protein found in wheat, rye and barley grains,” he explains with the essential background. “There is a sliver (1%) of the population that has celiac disease and can’t process gluten. It causes lots of problems for them. And the only solution is to eat a gluten-free diet. Yet somehow a good chunk of the population got it in their heads that eating a gluten-free diet per se is somehow healthier.”
Thus do foods that never had gluten to begin with — like yogurt and canned vegetables — now have “gluten-free” emblazoned on the label. Meanwhile, worldwide sales of products formulated to be gluten-free totaled $2.1 billion last year — double the 2007 figure, says The Wall Street Journal.
The way to play it, according to Chris? Pulses. You might know them as legumes — “crops such as lentils, peas, chickpeas and beans,” he explains. They’re a good source of protein, high in fiber, low glycemic index… and they’re gluten free.
“Besides making gluten-free products, food-makers mix pulses with wheat to make flour and baking mixes, cereals, crackers, soups, pastas, sauces and more.” Chris likes one of the industry leaders in this space, although we’ll withhold the name today out of courtesy to his paying readers of Mayer’s Special Situations.
Note to small-business owners: Be very careful firing employees for screaming at you.
The invaluable Overlawyered blog alerts us to two recent decisions by the National Labor Relations Board. The first involved a staff meeting at a car dealership in Yuma, Ariz., where a worker lost his cool and called his supervisors — well, let’s just say several variations of the f-bomb. He stood up, shoved his chair aside and told them they’d regret it if they fired him.
He was duly fired… but the NLRB found his termination “an unlawful violation of the employee’s rights to engage in the protected concerted activity.”
Meanwhile, a man trying to unionize four Starbucks in Manhattan told a manager to go, umm, have self-induced carnal knowledge. In front of customers, he said this. For which he was duly fired.
The Seattle Post-Intelligencer reports the NLRB ordered Starbucks to offer him his old job “or a substantially equivalent position, compensate him for any loss of earnings and other benefits and remove from its files any references to the unlawful firing.”
We can only imagine how awkward that first day back might be…
“I saw a chart once,” a reader writes, “that showed how much less the dollar is being used in international trade over time. The chart came with a brief explanation of the stats. It obviously showed that in the last 10 years or so, the dollar is in a downtrend in use. I would guess that the downtrend is accelerating in the near term.
“I searched online for this chart, but was unable to find it. Can you direct me to where I might locate the stats on this and a chart? And perhaps you might do a short 5 item?”
The 5: We think the figure you’re referring to is the dollar’s share of official (central bank and government) foreign exchange reserves.
We can’t locate a chart on the fly, but our crack graphics team put this one together based on figures from the International Monetary Fund. The figure indeed fell from 71.5% in 2001 to 61.3% in 2010.
If the numbers are updated every three years, presumably the 2013 figures will be out within the next few months. We’ll keep an eye peeled. In the meantime, for an exploration of a world in which the dollar matters less and less, we direct you to the current issue of Apogee Advisory, featuring Jim Rickards.
“One of the best ever,” a reader writes of yesterday’s episode. “I laughed, I cried, I managed not to wet myself.
“Devil’s ear?” he says of that gold find in Siberia. “Pull the other one. It’s got bells on.”
“Please help me,” writes our correspondent from Malaysia, responding to the more serious side of yesterday’s episode.
“Rattner’s quote ‘educating and training Americans to perform the more skilled jobs that cannot yet be performed by workers in developing countries,’ is difficult for me to understand. So I understand from this that America does not have many of those skilled workers (just like a developing country). SO I conclude that the U.S. is just the same as a developing country? Or has the U.S. developed (and cannot become more developed, by definition) and is in a retrograde situation?
“I must add that living in a developing country, and having lived in developing countries for almost half my life (and I am retired) I see plenty of highly skilled workers of the sort in the list, and compared with those same highly skilled workers in developed countries, they are just as skilled but half-price!
“Cheers from a developing country, and I remain confused.”
The 5: Meh. Rattner’s riff on “education and training” has been a favorite fallback of the American punditocracy for more than 30 years.
Back then, it wasn’t China and the “developing world” that was having our lunch; it was the highly developed Japan. We Americans were supposed to form our own version of Japan’s vaunted Ministry of International Trade and Industry (MITI) and “retrain the workforce” to “prepare for the 21st century.”
Then Japan sank into a depression (that’s still going on 25 years later), and the punditocracy did its best Emily Litella bit — “Never mind…”
If China’s heading for the train wreck that people like author Jim Rickards and 5 PRO editor Dan Amoss anticipate, these latest bloviations will also go down the memory hole…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. If you missed the email earlier today, we just published our most controversial expose yet.
It documents a critical link between the falling value of the U.S. dollar… and the assassination of JFK.
We can’t guarantee how much longer we’ll be able to keep this presentation online. Best check it out right now.