Oil and Liquidity

Fri, 2014/08/22 - 11:35am | Your editor

The news from Bloomberg yesterday was astonishing. This July, the US imported 12% less oil (crude and products) than it had in July, 2013, 9.06 million barrels per day (mbpd). In fact, the imports were the lowest in any July since 1995, according to data from the American Petroleum Institute, an industry body. The reason was the surge in domestic crude production.

In July the US produced at home 8.5 mbpd. That was the highest domestic production in any July in19 years, since 1986. And in the prior 6 months, starting in February, another record was hit: the US produced at least 8 mbpd of oil every day.

These record production highs and record import lows are not because US drivers bought less oil, or cut demand. In fact, oil deliveries rose 1.3% this July from last year, and demand for gasoline was up by nearly as much. The figures signal a shift in “black gold” production for our market away from foreign fields, be they OPEC, Canadian, or Venezuelan, and toward the USA.

This marks major macro-economic and geopolitical changes:

  1. US Middle East policy is liberated from the need to maintain the power of Saudi and Persian Gulf autocrats and dictators, the Sultan of Brunei, Siberia, the Caspian Sea coast, Iraq, sub-salt Brazil, Colombia, Venezuela. We still have global interests but they do not include continued dependence on their crude oil;

  2. King Coal has been dethroned. This is bad news for Harlan County where the mines are the chief employer. But a sensible Appalachian development program is affordable if government and the private sector together focus on unmet national needs which the region can fill: elder care, education, wildlife conservation, organic food production, back-office staffing, tourism and sports facilities to name a few off the top of my head. The beautiful hills can also be the site of clean new refineries the US needs to process ligher shale crudes. More US refineries east of Appalachia which can deliver to the US Gulf Coast, Atlantic ports, to the Great Lakes are needed to refine lighter shale crude for eastern US demand and to export refined products rather than crude to major deficit markets, starting with Europe. Kentucky is in the sweet spot;

  3. Oil companies will explore and drill in new regions of the world with geology similar to our Bakken and other tight oil and shale gas sites: Mexico, Indonesia, Poland, Bulgaria, Britain, Colombia, even Ukraine. It is a brave new world out there;

  4. The strong dollar is not a fluke. Lower imports cut the trade deficit sharply, and our normal services surplus count for more. The US June trade deficit in goods (the latest reported) was down $3 bn from the May level of just over $60 bn, a 5% drop. The overall goods and services deficit was $41.5 bn, also down $3 bn because of plummeting petroleum imports;

  5. The current US system of taxation and protectionism in oil needs reform if alternative fuels are to gain or retain a foothold. We do not need solar, nuclear, wind, or geothermal power to cut our dependence on imports. We still need them because of the threat of global warming. So the price of low-carbon energy has to be supported.


More for paid subscribers follows from Jordan, Israel, Switzerland, Argentina, Hong Kong, China, India, Britain, Australia, Sweden, Finland, and Canada plus some vital information on liquidity:

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Tightening Impact

Thu, 2014/08/21 - 12:43pm | Your editor

It is not just the Bank of England where a minority of policymakers support tightening of credit. At our Fed too the hawks are swooping led by Kansas City Fed Chief Esther George. She has no vote at the main Fed.

Fund managers John P. Calamos and Gary Black of Calamos Investments analyze of the prospects for higher interest rates and how they will affect high yield funds:

We present four scenarios that forecast one-year returns for the U.S. high yield bond market in varying market environments. The scenarios examine changes in default rates, recovery rates, spreads, and Treasury yields to depict forecasted returns for the overall U.S. high yield market. These returns do not represent actual performance, are not guaranteed, and serve only to illustrate possible total returns for changes in the four variables. An investor’s actual performance may differ dramatically from these forecasts depending on many factors.

Scenario 1: The economy expands quicker than expected, leading to lower defaults (1.5%), while recoveries maintain long-term averages (40%). With an improving economy, spreads tighten to +300 in this scenario but are offset by 5-year Treasury rates rising to 2.25% as the taper continues unabated and more talk of the first Fed rate hike intensifies. In this bullish scenario, the high yield market generates a hypothetical total return of 6% over the next 12 months.

Scenario 2: Default rates are in line with Moody’s projections (2.5%) and recovery rates maintain long-term averages (40%). In this scenario, spread tightening of 22 basis points to +350 is offset by 5-year Treasury rates rising by 37 basis points to 2%. This scenario generates a hypothetical return of 4.4% for the next 12 months.

Scenario 3: Defaults and recovery rates are the same as [in] Scenario 2 but 5-year Treasury rates ratchet up to 2.5%, while spreads stay fairly constant and widen by 3 basis points to 375 bps. In this scenario, the carry return more than offsets loss from defaults and interest rate increases to generate a hypothetical return of 1.3%, which would generate positive excess returns over Treasurys with comparable maturities.

Scenario 4: In our worst case scenario, the economy does not expand as expected and default rates tick higher to 3.5% while recovery rates decline to 35%. Spreads widen significantly to 600 basis points and five year Treasury rates rally back to 1.25%. In this scenario, the hypothetical return would be -2.9% .

The combination of stable Treasury yields, moderate economic growth and extremely low volatility continues to be supportive of the high yield asset class. We still expect Treasury yields to migrate higher as the year progresses.

(Thanks to Nicolas Bornozis of capital link, publisher of Closed-end Fund Newsletter, for sharing this paper.) In addition to the Calamos closed-end fund group inputs on the USA, we publish more for paid subscribers about other markets today. Plus more from China, Japan, Singapore, Hong Kong, Britain, France, Spain, Switzerland, Finland, The Netherlands, Australia, Israel, Egypt, and Canada.

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Flak and Bleeding Brass in Canada and Finland, Israel and Argentina

Wed, 2014/08/20 - 12:44pm | Your editor


Argentina is trying an end-run which may result in its being held in contempt of court, to avoid having to negotiate seriously with the hold-out hedge funds over its debt. These owners of ~10% of the bonds refused to join in the 2005 and 2010 deals to extend duration and cut yield on the bonds. They had been issued by Argentina under US law during the prior Argentina government of Nestor Kirschner, whose widow, Cristina Fernandez, now runs the country.

Cristina yesterday proposed a law that would make Banco de la Nacion, a govt-controlled local bank, trustee for the refinanced bonds, in place of Bank of NY-Mellon. A US judge has ruled that BNY is not allowed to make payments of $539 mn on the refinanced bonds unless it also paid the holdouts. As a result, no payments can be made, putting Argentina into default. Read more »

Flak and Bleeding Brass in Canada and Finland, Israel and Argentina

Wed, 2014/08/20 - 12:44pm | Your editor


Argentina is trying an end-run which may result in its being held in contempt of court, to avoid having to negotiate seriously with the hold-out hedge funds over its debt. These owners of ~10% of the bonds refused to join in the 2005 and 2010 deals to extend duration and cut yield on the bonds. They had been issued by Argentina under US law during the prior Argentina government of Nestor Kirschner, whose widow, Cristina Fernandez, now runs the country.

Cristina yesterday proposed a law that would make Banco de la Nacion, a govt-controlled local bank, trustee for the refinanced bonds, in place of Bank of NY-Mellon. A US judge has ruled that BNY is not allowed to make payments of $539 mn on the refinanced bonds unless it also paid the holdouts. As a result, no payments can be made, putting Argentina into default. Read more »

Right of Reply in Missouri

Tue, 2014/08/19 - 12:31pm | Your editor

WS, a long time Missourian reader exercised his right of response to my note on Ferguson yesterday:

“I object to the phrase 'schoolboy error.' We in Missouri are closer to the situation than you. Some graduates of my high school, Normandy, the worst high school in the state, with just 8% of students competent in math, still have parents living fairly close to the W. Florissant area; we shopped and played on these same streets before the dysfunctional Missouri tax system rewarded wealthy taxpayers for putting up these massive Cabrini-Green type complexes that breed crime.

“I agree with you, this is not a simple error by the police; it involves tragically excessive force. But let's talk about your wording 'schoolboy error.' Did you see the police video or frames from the video? Is this just a schoolboy error, grabbing the storekeeper's shirt and practically lifting him off the ground?

“This was not just shoplifting.And you are right about the immigrants being amazed. St. Louis immigrants from Korea, Bosnia, and elsewhere have been amazed to discover the risks from working in American convenience stores. They had to bury relatives whose only crime was to work the late shift and were shot by thieves in the convenience store, who like Brown were using force.

“Just to be sure, you wouldn't call those armed robberies that turned fatal schoolboy errors, would you?

“He can vote, he's not a kid. If your kid dropped out of college, hung out at night on the street, was arrested multiple times, and was bullying storekeepers, would you sum this up by saying, 'he's not perfect?' This is a different culture than we had before. But still, I grieve right along with the mom.”

Your editor thinks the Missourian is wrong about the late Michael Brown dropping out of college or having an arrest record as I have not seen this reported. Hedy Epstein of St. Louis, a 90-year-old Holocaust survivor, was arrested yesterday for blocking the entrance to Gov. Jay Nixon's office yesterday. She was protesting the shooting by police of Michael Brown.


We don't currently recommend BHP (dual-listed in the UK and Australia with ADRs on both, BBL and BHP respectively). A strong sell-off followed the announcement that it would spin off assets into a new global mining and metals company, but the Oz version sold off more sharply than the British. Broken Hill Proprietary that was combined with Britain's Billiton in the days when big was big; now they are undoing the merger.


To add your voice against massive addition of antibiotics to animal feed which helps keep down meat prices while adding greatly to the risks that drug-resistant germs will infect human beings, please visit the Consumer Union website, https://secure.consumersunion.org/site/advocacy;js


A note called “The Mitzvah Factory” was posted by the Southern Investigative Reporting Foundation on the www.talkmarkets.com website to which I also contribute. By Roddy Boyd, it's about a US insurance group and its foundations to help Belzer Chassidic causes. It is outside my remit. News today from Portugal, Australia, Canada, Mexico, Singapore, Brazil, South Korea, and Pakistan.

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Ferguson On My Mind

Mon, 2014/08/18 - 12:36pm | Your editor

My father's younger brother, born about 1917, was arrested during the 1933 transition between normal government and Naziism in Germany for stealing fruit. I am not sure if my teen-aged uncle stole fruit from a shop or a neighbor's tree. But as a result, Uncle Rudi could not get a US visa and come to America with his siblings and his parents. He emigrated to Israel in 1937 instead.

I recall this family history as I read about the tragedy of Michael Brown in Ferguson, Missouri. Rudi was a silly teenager who was a target because of his race and because he committed a minor infraction of the law. And like Michael Brown, his life was put in danger because of this (if only years later). The difference is that even in the early days of Nazi Germany you were not shot for a minor theft. Can it be that a black American youth is at greater risk over a schoolboy error from the local cops than a Jewish boy in Nazi Germany?

When German Jewish refugees arrived in the US they were astonished at the level of oppression suffered by African-Americans, but also relieved that it meant they were not the prime targets.


Where is economic growth going to come from? I think it will spread from the USA and Britain to the European Union in the rest of 2014 going into 2015. The slack in global economic outlook appears to be general in most of the world, with poor performance in Japan, China, Australia, combined with falling output in Germany, the locomotive of Europe. France has opted to boost its deficit in order to offer stimulus to the economy, mainly to business. Italy is again formally in recession, having had two down quarters.

Deflation again is a risk. I think the economics fraternity are aware of the dangers and will act. In fact they have begun in Europe today, as I report.


More for paid subscribers follows:

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Tables Posted

Sun, 2014/08/17 - 12:39pm | Your editor

The latest www.global-investing.com stock tables have been posted on our website. Please visit to view our performance. The closed-positions table is visible to all; the current holdings in stocks, bonds, closed-end and exchange-traded funds may only be viewed by current subscribers. It is a tale of stock picks from two men named Julius and one named Jerome.

Your editor gets Barron's on Saturday, before it is published on Mondays, among other things to prepare the tables. Its current issue features one of my very long-time Global-Investing favorites. It also features two other USA stocks that were in the news last week.

One is Kinder Morgan Energy Partners, which I sold to avoid tax complications as it converts from an LP into an operating company. My involement with what turned into KMI goes back to my childhood when my father, Julius Oppenheim, invested in natural gas when it was first pipelined to NYC. He bought El Paso Corp of Texas which brought to us natural gas that had previously been flared and wasted.

We had to have our stove converted from coal gas made by Con Edison in a filthy process which blew out soot and ruined air quality near its plants. Back then nobody knew about environmentalism but I think that was what motivated Dad.

Another older generation favorite is a cover story in Barron's, BB&T, a regional bank which my daughter-in-law's grandfather loaded up on. Julius Seligson, a NYC lad, attended Lehigh University on a tennis scholarship and travelled around the south then and later as an amateur tennis champ wallopping tennis balls (and selling insurance).

The other Julius watched BB&T, formerly only in the Carolinas, build out its banking presence in growth areas like Florida and the DC and Atlanta suburbs. 

Barron's says BBT is trading at 12x earnings, a 14% discount to its historic level. It was rated outperform by Wells Fargo analysts.

The third hot idea is for paid subscribers only.

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Playing Putin

Fri, 2014/08/15 - 12:25pm | Your editor

The social forces inciting investor euphoria and then suddenly flip them into mass panic are like those which cause disasters as crowds head for the exit. A mass panic among Muslim pilgrims to Mecca in 1990 killed thousands.

Herd panic is triggered by darkness, noise and yelling, lack of information, ignorance, fear. People assume that they are trapped and stampede toward the doors, not realizing that this increases the danger to themselves and others.

In financial panics the same destruction occurs, and also partly results from ignorance. But financial panics also are fed by resentment. Market participants assume that some villains are profiting from knowing more than they do. Some alleged market panic-sowing villains are the product of rubbishy urban myths: Putin's Russian oligarchs or Communists; the giant squid (AKA Goldman Sachs); the Fed's supposed gold suppression scheme; the Bilderberg Foundation; the Rockefellers or the Rothschilds; secret Masonic or Zion or Vatican kingmakers, other conspirators. Read more »

Socialists and Super Stars

Thu, 2014/08/14 - 12:49pm | Your editor

Three bits of commentary I did not reply to for general consumption. PF asks, “Is Putin pure evil or am I imaging it? :)”

“In Latin America, becoming rich by fraud or looting is easier than by capitalism” notes Mexican capitalist reader, Eduardo Garcia (who writes www.sentidocomun.co.mex.) He notes that Mexican mining union boss Gomez Urrutia has taken up Canadian citizenship to hide his ill-got loot.

He also quotes Bloomberg Markets, about Venezuelan amigo-of-Chavez and officially “Socialist” Capt. William Biancucci who bought a private plane to hop over the Brazilian border to manage his cattle ranch. It was created with government subsidies to provide beef to Venezuela but the Venezuelan slaughterhouses are not getting the cattle. Where's the beef?

Biancucci told Bloomberg that “socialism is the solution to poverty” while admitting that “Chavez’s socialism has made him rich.” I’m a socialist, but I love having cash in my hands,” he said. “Socialism is wealth.”

Biancucci is part of a Chavez-backing Venezuelan coterie who became exceedingly wealthy during ugo Chavez's 14 years in power. These supposedly Leftist supporters received billions of dollars from the government after Chavez took office in 1999, for ventures in food distribution, banking, and other activities. Bloomberg says the fund flow is shown in Venezuelan government records.

Yet perhaps there is hope for talent after all. Ben Combes in research@llewellyn-consulting.com, run by macroeconomist John Llewellyn from London, writes about the potential for wealth as new stars rise in the global on-line market for education and health.

Combes writes:

Both sectors lend themselves to global markets; and both currently take up a large and growing proportion of personal and national income.
“In education, Massive Open Online Courses (MOOCs) are transforming the reach of tertiary education in scale and geography alike. Millions of students can now access pre-recorded material from ‘star’ academics.
“In healthcare, digitalisation is enabling doctors, nurses, and technicians to undertake routine tasks and transmit the information instantly, anywhere in the world. Top specialist consultants will reach patients’ bed-sides with accurate and up-to-date information. Camera technology created the potential to have a ‘Skype’ catch-up so ‘star’ consultants reach many more patients.”
Combs thinks some doctors could become ‘superstars’ like Michael Jordan or David Beckham. He anticipates:

Beyond education and healthcare, other service sectors, (legal and finance), are likely to be subject to similar forces. Broad developments of particular significance:
 Truly exceptional performers, be they surgeons or diagnosticians, lecturers or researchers,
increasingly being able to draw a clientele from the world as a whole; and
 The salary of such emerging ‘superstars’ rising towards film-star levels.”


More for paid subscribers follows from Australia, Ireland, Israel, South Korea and Africa, Canada, Colombia, Brazil, and Hong Kong, including two quarterly reports.

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The Seven Horsemen

Wed, 2014/08/13 - 12:48pm | Your editor

Food for thought for investors. A young MBA student of my acquaintance summer-interning at Morgan Stanley has written about the “Seven Horsemen of the Apocalypse”. Being Jewish, she got the number of horsemen in the Book of Revelations wrong. Officially there are only four horsemen.

But her list reverberates and was recently quoted by Bloomberg:

  1. Climate change;

  2. Scarce water;

  3. Disposal of vast amounts of urban waste;

  4. Insecure food supplies;

  5. Public health burdens;

  6. Economic inequality; and

  7. The demographic and pension cliff.



Her list of negatives can be used to try to find companies able to forestall these potential apocalyptic crises. Morgan Stanley listed ten large-cap US equities to buy, promising that they would offer “a positive return over a shorter time horizon”, like 12 to 18 months. Large cap means with a market cap of over $2 bn. And the positive return the brokerage is aiming for is 10% in the next 1-1.5 years.

I think that these issues will not be resolved fast, and that the 12 to 18 month investment horizon is way too short. If you invest to solve these problems, take a longer view.

Moreover, these problems are global in scale, rather than confined to the US, and require global investment. Only looking at US companies in these crisis areas is absurd: the list is of global problems.

Nor do I think there is any inherent advantage for large-cap players.

Bloomberg noted that the problems she cites are notorious, fuzzy, amorphous risks that belong to everyone and therefore no one, why unabashed leadership in the fight against them is so hard to come by in the civic sphere or private sector.”

“There problems seem infinite, and, what's worse, can be addressed only by infinitesimal measures. Why even bother?” The main reason is that the survival of everyone's economy and lifestyle depends on defeating the 7 horsemen.


The latest replacement for Siri (Apple's voice to answer questions) created by of artificial intelligence experts who set up on their own is called Viv. This according to Wired magazine. No relation!


More for paid subscribers including four quarterly reports (stunning or flat or confusing, why today's blog is late) and other news from around the world follows:

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