Economic Outlook

Baltic Dry Index Hits New 29 Year Low

The very recent fall of the Baltic Dry Index (BDI) to the lowest level since 1986 (Figure 1.) confirms our fears about the health of the world economy. Why is the drop in the index a bad sign for the global economy?

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….read entire article HERE

Marc Faber on Dollar, The US Economy & Global Interest Rates

 

Marc-Faber-ESA ee17d6cd86QE has Grossly inflated Asset Prices

This year could be the year when investors lose confidence in central banks’ ability to engineer a sustained economic recovery, Marc Faber said in a presentation in London.

So far, London and New York property, as well as equities, have “reacted very well” to the Fed’s quantitative easing efforts, “but that doesn’t boost the wealth of the nation and it leads to less social cohesion,” he warned.

“One of the problems of this liquidity injection is that the Fed can force relatively responsible central banks to print money,” Faber added.

QE has “grossly inflated” asset prices and as a result U.S. equities as “highly expensive,” Faber said. A sustainable recovery should be based on investment rather than on consumption, but companies will find it more difficult to boost profits in the current economic climate, he added.

Canary’s Alive & Well

This week we will cover the ECB QE action, Euro, USD and their implications for global trade.  We’ll also update a still-intact rally in gold, silver and the miners along with some (NFTRH+) trade opportunities.  But first let’s review December’s Semiconductor Equipment sector Book-to-Bill ratio, just out on Friday evening and discuss some of the dynamics in play with respect to the ‘b2b’ and the US economy.

b2b

From Semi.orgThe three-month average of worldwide bookings in December 2014 was $1.37 billion. The bookings figure is 12.3 percent higher than the final November 2014 level of $1.22 billion, and is 1.1 percent lower than the December 2013 order level of $1.38 billion.

“While three-month averages for both bookings and billings increased, billings outpaced bookings slightly, nudging the book-to-bill ratio slightly below parity,” said SEMI president and CEO Denny McGuirk. “2015 equipment spending is forecast to remain on track for annual growth given the current expectations for the overall semiconductor industry.”

For our purposes in gauging the US economy, it is the ‘Bookings’ category that is most important, because orders booked today represent future economic activity. So while the actual b2b has declined a bit, it was due to accelerated billings with bookings actually increasing in December.

As for Mr. McGuirk’s forecast, we’ll take that with a grain of salt as this highly cyclical industry in particular is subject to sudden re-do’s when it comes to forecasts. With positive trends currently firmly in place, what is he going to say ‘the trends have been good but we have a feeling it is all about to grind to a halt’?? We’ll just robotically update the b2b each month going forward and use actionable data.

For now, the Canary in the Coal Mine is chirping away, and so a key forward-looking US economic indicator is fine. But you may recall that in Q4 2014 we drew a parallel between high end Semiconductor fab equipment and new Machine Tool sales. So with the caveat that I have no hard data to correlate year-end Semi Equipment sales dynamics with those of Machine Tools, we wondered if the SEMI b2b might get a December bump just as we are able to set our watches by year-end (for tax management considerations) Machine Tool sales. I have marked up the graphic from EDAdata.com:

machtools

 

Larger Image

Far from the days of the skilled machinist deftly turning handles with great precision while making calculations to tight tolerances, today’s machinist is a programmer with a CAD/CAM system and wireless data download to what are in some cases $1,000,000 or higher production beasts.  A typical range is in the $150,000 to $700,000 per unit.  One machine can easily cost more than a fine 5 bedroom home in a nice neighborhood.  The point is, this ain’t Grandpa’s machining industry.  It is high end manufacturing technology.

We have been thinking about the strong US dollar and its likely effects on the US economy over time.  So far, there is some moderation in the data that mainstream economists and financial media focus on.  The December ISM report on manufacturing moderated, with particular focus on ‘New Orders’, Wage growth has failed to take hold, Jobless Claims bumped up last week above expectations and Existing Home Sales came in well lower than forecast by economists.

But generally, the picture is still okay, albeit wavering.  Oh, the Consumer is giddy.  Okay, well… we have been in an ‘as good as it gets’ phase so why shouldn’t he get out there and run up his credit card a little?

The point is, we have expected a couple things…

1)    The relentless strength in USD to eventually wear away at US manufacturing and exports (this maybe be in its very early stages) and…

2)    A year-end phenomenon in the US Machine Tool industry to remain unbroken.  This would see a spike in December’s Machine Tool sales primarily due to reasons other thanthe economy.

The usual sources in the mainstream economic analysis sphere are looking at the usual economic data sets.  We will watch those, but to be as early as possible in getting real economic signals we need to watch the Canaries that started the whole economic upswing as we noted in real time in January of 2013; Semiconductor Equipment and by extension, manufacturing in general.  These led by a country mile the now readily observable economic revival.

Machine Tools sales are due for a spike and we have identified one company (NFTRH+, reviewed next segment) as a short after the year-end sales bump and continued stock price appreciation.  We also have another company from the long side (NFTRH+, also reviewed next segment) for a trade.  Company #1 is a standard US based machine tool builder with a lot of competition and Company #2 is also based in the US, but has far less competition for its unique product line.  Back on the main topic…

Bottom Line

Certain economic data have softened in recent weeks in line with the idea that an impulsively strong US dollar can start to fray the edges of certain industries and sectors.  But we will await confirmation by the Canary that started it all in January of 2013.  SEMI just reported a very decent Semiconductor Equipment b2b and the Machine Tool segment is due for its traditional year-end bump.

If these prove to have been seasonal bumps, perhaps trades can be made but more importantly, we may yet get some confirming negative economic data points a little further into 2015.  We should watch future ISM, b2b and Machine Tool sales closely.

NFTRH.com

When The World Monetary System Collapses, Life Will Go On

King-World-News-When-The-World-Monetary-System-Collapses-Life-Will-Go-On1-1728x800 cToday a 40-year market veteran sent King World News an incredibly important piece that discusses everything from the New World Order to global monetary collapse.  This piece exclusively for KWN also notes that when the world monetary system collapses, life will go on.

Quintus Fabius Maximus Verrucosus was a Roman politician and general who lived between 280-203 B.C. He came to fame during the years when Hannibal was ravaging the Roman armies and countryside. After the disastrous battle of Lake Trasimene during which another consular army was wiped out by Hannibal, a panicked Roman Senate called upon Fabius to take over the defense of the state. Fabius was given the rarely used power of Dictator….

Continue reading the Robert Fitzwilson piece HERE

 

Energy Crisis As Early As 2016

Low oil prices today may be setting the world up for an oil shortage as early as 2016. Today we have just 2% more crude oil supply than demand and the price of gasoline is under $2.00/gallon in Texas. If oil supply falls too far, we could see gasoline prices doubling within 18 months. For a commodity as critical to our standard of living as oil is, it only takes a small shortage to drive up the price.

On Thanksgiving Day, 2014 Saudi Arabia decided to maintain their crude oil output of approximately 9.5 million barrels per day. They’ve taken this action despite the fact that they know the world’s oil markets are currently over-supplied by an estimated 1.5 million barrels per day and the severe financial pain it is causing many of the other OPEC nations. By now you are all aware this has caused a sharp drop in global crude oil prices and has a dark cloud hanging over the energy sector. I believe this will be a short-lived dip in the long history of crude oil price cycles. Oil prices have always bounced back and this is not going to be an exception.

To put this in prospective, the world currently consumes about 93.5 million barrels per day of liquid fuels, not all of which are made from crude oil. About 17% of the world’s total fuel supply comes from natural gas liquids (“NGLs”) and biofuels.

One thing that drives the Bears opinion that oil prices will go lower during the first half of 2015 is that demand does decline during the first half of each year. Since most humans live in the northern hemisphere, weather does have an impact on demand. I agree that this fact will play a part in keeping oil prices depressed for the next few months. However, low gasoline prices in the U.S. are certain to play a part in the fuel demand outlook for this year’s vacation driving season.

Related: Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic

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Brent oil prices are now hovering around $60 a barrel. In my opinion, this is quite a bit lower than Saudi Arabia thought the price would go and may lead to an “Emergency” OPEC meeting during the first quarter. But for now, I am assuming that Saudi Arabia is willing to let the other OPEC members suffer until the next scheduled OPEC meeting in June.

The commonly held belief is that Saudi Arabia is doing this to put a stop to the rapid growth of production from the U.S. shale oil plays. Others believe it is their goal to crush the Russian and Iranian economies. If the oil price remains at the current level for a few months longer it will do all of the above.

My forecast models for 2015 assume that crude oil prices will remain depressed during the first quarter, then slowly ramp up and accelerate as next winter approaches. I believe that by December we will see a much tighter oil market and significantly higher prices. In a December 24, 2014 article in The National, Steven Kopits managing director of Princeton Energy Advisors states that, “In permitting low oil prices, the Saudis seek to bring the market back into equilibrium. At present, our calculation of break-even system-wide is in the $85–$100 a barrel range on a Brent basis.”

Mark Mobius, an economist and regular guest on Bloomberg TV recently said he sees Brent rebounding to $90/bbl by the end of 2015.

Since 2005, only North America has been able to add meaningful crude oil supply. Outside of Canada and the United States (including the Gulf of Mexico), the rest of the world’s crude oil production netted to a decline of a million barrels per day from December, 2010 to December, 2013. More than half of the OPEC nations are now in decline. We’ve been able to supplement our fuel supply during the last ten years with biofuels, but that is limited since we need the farmland for food supply.

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I believe the current low crude oil price could be overkill and result in the next “Energy Crisis” by early 2016. Enjoy these low gasoline prices while they last.

The upstream U.S. oil companies we follow closely are all announcing 20% to 50% cuts in capital spending for 2015. We will start seeing the impact on supply at the same time the annual increase in demand kicks in. Our model portfolio companies are all expected to report year-over-year increases in production, but at a much slower pace than the last few years.

A study released by Credit Suisse two weeks ago shows that U.S. independents expect capital-expenditure (Capex) cuts of one-third against production gains of 10 per cent next year. This would imply production growth of 600,000 bpd of shale liquids, and perhaps another 200,000 bpd from Gulf of Mexico deepwater projects. At the same time, U.S. conventional onshore production continues to fall. I have seen estimates of 500,000 to 700,000 bpd declines within twelve months. If these forecasts are accurate, U.S. oil production growth would be barely positive next year and headed for a material downturn in 2016.

North American unconventionals (oil sands, shale and other tight formations) have been almost all of net global supply growth since 2005. If unconventional growth grinds to zero and conventional growth is falling outright, the supply side heading into 2016 looks highly compromised. At today’s oil price, only the “Sweet Spots” in the North American Shale Plays and the Canadian Oil Sands generate decent financial returns to justify the massive capital requirements needed to continue development. Global deepwater exploration is rapidly coming to a halt.

Were demand growth muted, this might not matter. Demand for liquid fuels goes up year-after-year. It even increased in 2008 during the “Great Recession” and ramped up sharply during 2009 and 2010 despite a sluggish global economy. Low fuel prices are increasing demand today and my guess is that, with U.S. GDP growth now forecast at 5% in 2015, we could see demand for fuels increase by close to 1.5 million barrels per day this year. The current IEA forecast is for oil demand to increase by 900,000 bpd in 2015.

If this plays out, the oil markets will be heading into a significant squeeze in the first half of 2016.

The last extended period of low oil prices was 1985 to 1990. In 1985, when oil prices collapsed similar to what’s happening now, the world had 13 million bpd of spare capacity, with 7 million bpd in Saudi Arabia alone. OPEC was well-positioned to comfortably meet any increase in demand.

Today, just about all of the world’s discretionary spare capacity resides in Saudi Arabia and amounts to an estimate 2 million bpd. Lou Powers, an EPG member and author of “The World Energy Dilemma,” has said that Saudi Arabia will have difficulty maintaining production at over 10 million bpd for an extended period. If we do swing to a supply shortage, Saudi Arabia may find itself in the position of needing to run the taps full out for much of 2016. In such an event, the world will be headed right back into an oil shock and we will see much higher oil prices than $100/bbl.

Related: The Hidden Costs Of Cheap Oil

Low oil prices will hurt the unhedged upstream companies, but they will hurt the oilfield services sector the most. I’m expecting the onshore active rig count to drop by 30% by mid-2015. Oil price will need to firm up for several months before the upstream companies commit to higher spending levels. That said, the high quality drillers like Helmerich & Payne (HP), Patterson-UTI Energy (PTEN) and Precision Drilling Corp. (PDS) will be fine since a lot of their high end rigs will keep working on long-term contracts. By 2016, they will have gained market share.

Remember, North America and deepwater are the only places with meaningful production upside. If crude oil prices move below $60/bbl and stay there for even six months it could prove catastrophic to non-OPEC supply. At some point, OPEC action may become necessary.

“But perhaps not by the Saudis. Russia’s position is comparable to Saudi Arabia’s. Either could cut production by meaningful quantity, but the Russians need the incremental revenue more. Saudi Arabia would be right to argue that any calls for production cuts should be directed to Moscow. OPEC could cut production to prop up prices and increase revenues. But for now, a better strategy (for Saudi Arabia) would be to hang back, deflect criticism, and let events play out. If the Russians are thinking clearly, Moscow will cut first.” – Steven Kopits the managing director of Princeton Energy Advisors.

The best news for all of us is that Iran may be quite willing to put an end to their nuclear enrichment program a few months from now. I believe this is the real reason for what Saudi Arabia is doing.

By Dan Steffens for Oilprice.com

 

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The Geopolitics of U.S.-Cuba Relations

stratforLast week, U.S. President Barack Obama and Cuban President Raul Castro agreed to an exchange of prisoners being held on espionage charges. In addition, Washington and Havana agreed to hold discussions with the goal of establishing diplomatic relations between the two countries. No agreement was reached on ending the U.S. embargo on Cuba, a step that requires congressional approval.

It was a modest agreement, striking only because there was any agreement at all. U.S.-Cuba relations had been frozen for decades, with neither side prepared to make significant concessions or even first moves. The cause was partly the domestic politics of each country that made it easier to leave the relationship frozen. On the American side, a coalition of Cuban-Americans, conservatives and human rights advocates decrying Cuba’s record of human rights violations blocked the effort. On the Cuban side, enmity with the United States plays a pivotal role in legitimizing the communist regime. Not only was the government born out of opposition to American imperialism, but Havana also uses the ongoing U.S. embargo to explain Cuban economic failures. There was no external pressure compelling either side to accommodate the other, and there were substantial internal reasons to let the situation stay as it is……

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