Monday, August 9, 2010

U.S. Distillate Demand Falling off a Cliff

Crude Oil had a breakout this week as the risk trade was put on, it benefitted from the short the dollar, and go long commodities play. Plus equities have been testing the higher levels, and trying to establish a higher trading range.

The problem with market participants today is that they become too bearish when indications appear bad and too bullish when indications appear good. For example on July 5th you couldn`t give crude oil away for $71 a barrel, and one month later, you couldn`t get anybody to sell it for $82.70 a barrel either. And the odd paradox of oil trading is that this is exactly what you should have been doing as a market participant. (more)

The Problem with Pensions

By John Mauldin

A report just out from the Center for Policy Analysis, by Courtney Collins and Andrew J. Rettenmaier (solid academic types from Mercer University and Texas A&M respectively), that indicates that state and local pension funds are drastically underfunded.

I first wrote about public pension problems in 2003, suggesting that pensions would soon be underfunded by $2 trillion, as a long-term secular bear market would dampen returns. Turns out that I am once again proven to be a wild-eyed optimist. Quoting from the executive summary:

"Many state and local government pension plans’ liabilities are calculated using discount rates that are not commensurate with the risk they may pose to taxpayers. Accounting standards allow pension funds to calculate their liabilities using a discount rate comparable to the expected rate of return on the funds’ assets. This typically high discount rate tends to reduce the size of a pension plan’s accrued liabilities. However, pensioners have a durable legal claim to receive their benefits and consequently, it is more appropriate to use a lower discount rate in calculating the plans’ accrued liabilities. (more)

Chart of the Day

Robby Noel Aug 06 2010 - U.S. Dollar Index Drop Like A Stone -

Jobs report was worse than expected. U.S. labor secretary tries to spin report, she did her best trying to hide behind the charts . Robby speculates that whatever increase in jobs in the manufacturing sector came from mining other than the 38,000 jobs which came from the "hamburger flipper" sector. Construction lost 11,000 jobs, believe it or not, the government lost 202,000 jobs....(these were census workers).

Gold $1206.70
Silver $18.48
Crude $80.92
US Dollar Index 80.38

The most amazing story this week was a story that got no coverage whatsoever. That China is sending a loud and clear message to the U.S. that they have lost complete faith in their investment portfolio that is holding U.S. treasuries.

After watching the U.S. dollar index drop like a stone in recent weeks, China appears increasing less willing to remain either a silent bystander or a hapless victim. As the largest foreign creditor to the United States with 868 Billion Dollars in Treasury Bonds, China has ample cause for concern.

>>>Former adviser to Chinese Central Bank delivered a no confidence vote in the safety of U.S. treasuries.<<<

In light of today's employment report, there is more talk that the FOMC could announce additional steps to ease credit conditions when they meet on August 10. FOMC could announce new stimulus measures, possibly through an asset purchase program.

As like other times in the past, whenever the economy gets bad...the next plan of action seems to be war.
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Adrian Day: Buy Gold, Sell Wheat (HAI): We've recently had a significant pullback in gold, and there are concerns about a gold bubble. What's your short-term outlook for the metal?

Adrian Day, CEO, Adrian Day Asset Management (Day): I tend to be more focused on the long term, generally. I'm a long-term value investor who doesn't mind grinding out the volatility to realize the potential of an investment. But there is a lot of discussion of gold.

Over the short term, I have been concerned about gold for a few reasons. For one, summer is often a seasonally weak period. For two, we obviously had a great run-up in gold in the spring, what with the Greek issues and the European sovereign debt crisis. Gold went substantially above trend and the bullish sentiment rose substantially. There have been lots of reasons to expect a pullback over the summer.

To be honest, I was expecting more of a pullback than we saw. I've been very, very impressed with gold's resilience. When you think about the run we had, to see a pullback from $1,250/ounce to $1,160/ounce really wasn't much of a correction.

I would be cautiously optimistic on gold in the short term. The pullback we saw may well have let a little bit of air out of the market and got the nervous holders out, so we may well be forming a new basis to move up. (more)

If Deflation Wins, What Will Gold Stocks Do?

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

The talk of a possible double dip is now common banter on TV investment programs. And indeed, deflationary forces seem to have the stronger grip right now than inflationary ones. So if deflation is the next reality we have to face, what happens to our favorite stock investments?

There’s lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don’t see a true deflation all that often. But of course we’ve got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment.

First, we know what happened to the stock market in 1929, and in that initial shock, gold stocks crashed too. A rally ensued in most equities until the following April, including gold stocks. Then the Dow took a one-way elevator ride down for the next two and a half years.

What did gold stocks do? (more)

Technically Precious With Merv, August 6, 2010

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Stimulus Americanus part 1

Some REITs Still Have Room to Run

Real estate remains a millstone for the economy as home sales languish despite historically low mortgage rates. But investors can still find some upside in the rental market.

Major apartment real estate investment trust stocks, or REITs, performed well during the second quarter. Many beat already high earnings expectations and offered stronger-than-expected guidance into 2011. Now, with conditions for REITs still improving, some could offer reassuring prospects in an uncertain equity market.

Rising rental rates, increased demand and small indications of rising confidence added up to better-than-expected second-quarter results for Apartment Investment Management (AIV: 21.31, -0.20, -0.92%), AvalonBay Communities (AVB: 101.34, -1.09, -1.06%), BRE Properties (BRE: 41.89, +0.05, +0.11%), Camden Property Trust (CPT: 46.31, -0.38, -0.81%), Equity Residential (EQR: 45.85, -0.06, -0.13%) and Post Properties (PPS: 26.02, -0.23, -0.87%). Although these stocks have climbed an average of 32% for the year-to-date and aren't exactly bargain buys, the sector still offers a promising medium-term outlook. (more)

What Is Really Going On With China Real Estate: A Standard Chartered Survey

China Real Estate Survey

In pursuing an answer to the most elusive question around these days, namely just what is going on in China's real estate market, Standard Chartered has conducted the first phase of an exhaustive survey analyzing precisely what the real estate trends in Beijing, Shangai, and other Tier 1, 2 and 3 cities. The survey attempts to answer such key questions as: "What is really going on in China’s real-estate sector? Are prices falling – and if not, will they? Are developers’ finances
getting tight, and if so, will they be forced to cut prices? Confronted with the State Council’s stringent cooling policies, are developers postponing project starts and stopping construction? And if they do stop building, will this derail the economy and thus force the State Council to loosen policy?" For all curious to learn more about the truth behind the hype regarding China's real estate, which has more polarizing opinions than pretty much any other issue, this is the presentation for you.

Some of the key findings: (more)

Niall Ferguson - The Ascent of Money - Q&A Session