It was another record week for the markets.
The Dow closed above 16,000 for the first time ever.
Still, concerns about the Federal Reserve tapering its Quantitative Easing program are again rattling investors.
Some predict that Janet Yellen, the new Federal Reserve Chair, will begin to cut the $85 billion per month in bond purchases within the next few months.
That news has sent shivers across markets in Asia and Europe.
Thanks to low interest rates to spur economic recovery in the U.S., easy money was pumped into higher-risk, higher-yield stocks in emerging markets. But taper talk has generated some sharp pullback, particularly in the Philippines, which is now dealing with the aftermath of Typhoon Haiyan.
Perhaps the biggest story this week is the downturn in domestic oil prices. The benchmark West Texas Intermediate (WTI) shaved another few percentage points this week, and is now trading below $95 per barrel.
This is a sharp drop from nearly $110 a barrel in early October. A number of readers have sent comments and emails, asking about this recent downturn, and more important, how long this could last.
At Money Morning, we highlighted the three primary reasons for lower WTI prices.
Iran may curb its nuclear program: Prices fell in preparation for another round of negotiations between Iran and the international community over economic sanctions and Iran’s quest to develop nuclear energy (and possibly a weapon). With concessions on its enrichment program a possibility, the geopolitical premium on oil prices could fall dramatically, while, at the same time, we witness a return to Iranian crude oil on the international market. The latter factor could alleviate price pressure in the India and Chinese markets, where demand is on the rise.
Global supply is back on the rise: Adding Iranian crude back into the market is just one geopolitical event that will constrain prices. With Libyan disruptions to the market now a worry of the past, Saudi Arabia has increased its exports and helped balance the global market. According to reports at the EIA and at Citigroup, OPEC has dramatically increased exports, which has reduced the strain on global stockpiles. Supply has been adequate enough to meet global demand, and it’s likely to do so for some time.
The U.S. is now the world’s largest oil producer: Thanks to the technological boost from hydraulic fracturing, the U.S. has created an immense oil supply boost to meet its growing demand. For the first time in 20 years, the U.S. produced more oil than it imported. And the news gets better. The EIA estimates U.S. crude production next year will average 8.5 million barrel a day, the most since the mid-1980s. That huge boost in supply is helping to alleviate price pressures here in the U.S.
>Keep in mind that production costs for shale fields are still high, upwards of $75 to $92 per barrel depending on the field. But the good news is that a prolonged period of U.S. oil production coupled with a reduction in geopolitical tensions could extend prices to the $95 range through the holiday season. That bodes well for the holiday shopping season as well, as consumers are able to put more money into their shopping list than in their gas tanks.
$43 TRILLION IN OIL IS ABOUT TO BE UNLOCKED
We’re always finding new ways to make money on oil and gas here in the United States.
But wait until you hear about what’s happening in Russia!
Our energy expert Dr. Kent Moors says that all hell is breaking loose in the Arctic Circle over $43 trillion in oil and gas locked beneath the frozen waters.
Now, it’s creating all sorts of political problems for Russian president Vladimir Putin, and he’s in a race against time to seize control of this huge energy supply. This mother lode includes:
900 billion barrels of oil…
1,669 trillion cubic feet of gas…
And another 44 billion barrels of natural gas liquids (NGLs).
Let’s be honest. This is the biggest oil story in the world today, and no one in the media is willing to talk about it because of the possible ramifications for Russian-American relations.
Kent is way ahead of anyone else on this story, and now we’re telling readers about it for the first time. You can see how investors can get in on this treasure trove of energy riches.
Just go here now. HOW TO PLAY THE DISCONNECT IN THE OIL MARKETS
Want another way to play the oil markets? Kent helped investors make a lot of money last time that this trend emerged two years ago. Now it’s back, and we’re going to profit a second time.
The investment opportunity that we’re talking about revolves around what’s called “the spread.”
This “spread” is the difference in price between WTI crude, priced in New York, and Brent crude, which is priced in London. WTI is trading at around $95, while Brent is back above $110.
And this spread between the two benchmark crudes continues to widen. Kent reports that the spread almost doubled in a week.
So here’s Kent’s recommendation on how to play this divergence in prices.
“There are three ways to identify the winners. Here’s what you need to look for:
First, you need to identify where companies fall in the upstream-midstream-downstream sequence.
Second, you need to know exactly what regions and basins the companies are active in.
And finally, you need to understand what infrastructure components and assets are essential to the companies and are under their control (or ownership).
The first consideration is why my Energy Inner Circle services target specific sectors of the upstream-midstream-downstream sequence where pricing may actually improve beyond the average performance of the oil sector.
Meanwhile, the second merely reflects what has become a major factor in today’s markets, especially in the United States. That’s because production, pipeline transport, and refining are not subject to the same uniform pricing pressures in different areas of the country. Some basins have less expensive production costs, storage and transit fees, and refinery operating expenses than others.
However, it is the third consideration that is contributing the most to this new disconnect.
Here’s why.
Moving product from the field to the end user involves a number of pricing points. If the transfer cost at each of these points requires arms-length contracts (those between distinct business entities), the overall profitability for the entire sequence will decline.
What is emerging, especially in the application of master limited partnerships (MLPs) and other restricted partnership arrangements, is the increasing consolidation of the separate components in the same operation.
Here’s why that’s important: It allows normal market costs to be replaced with a kind of transfer pricing.
This type of pricing is why big oil companies used to try to control as many stages of the process as possible. This ushered in the age of the vertically integrated oil companies (VIOCs).
Some of these remain, but the climate is very different now.
For most companies today, specializing in their most efficient aspect – while also finding ways to associate cost controls with others - is the new mantra.
The companies that are succeeding are the ones that have put more of their costs within a new transfer pricing arrangement. These separate operations are no longer contained in the same corporate structure (the traditional meaning of transfer pricing), but accomplish the same result.
Therefore, in a market where oil prices are declining but demand still remains, some companies are going to see better bottom line results. In the end, you can bet it will be reflected in higher share prices for oil stocks.
The game is now less about the price of oil and more about the different strengths of each individual operator.
That “spread” is already improving our prospects for higher returns?THE BEST CONGRESS MONEY CAN BUY…
We have written a lot about Congressional corruption in Washington.
Thanks to centralized planning, Washington now has a higher income per person than Silicon Valley. Roughly 15 cents of every dollar taxed at the Federal level ends up in the pocket of someone living within 50 miles of Washington D.C.
And 10 of the richest 15 counties in the United States surround our nation’s capital. Yes, things are pretty ridiculous in the District of Columbia.
But then, I saw the chart below. I didn’t believe my eyes.
As you know, there is a lot of money spent on lobbying in Washington. While we call such spending bribes, others see their donations to campaigns and committees as strategic investments. By investing a little in Congress, they can expect some rules changed to help make their business or sector more profitable. And from banking to healthcare, those investments just keep coming…
Lobbying reached about $3.5 billion per year in 2009. After adjusting for inflation, this comes out to a 90% increase from 1999. That’s a staggering increase in “government investments.”
So did these investments work out for companies? Luckily, someone figured that out for us.
Strategas, an institutional brokerage firm, created an index measuring the performance of top lobbying companies against the S&P 500. The companies in the Strategas Lobbying Index have the most intensive lobbying in terms of expenditure as a percentage of their assets.
You probably won’t be surprised at the results, which strongly indicate that the best investment around… is your Congressman.
The Strategas Lobbying Index has outperformed the S&P 500 by 11% per year since 2002 and by an incredible 30% in 2012.
Just shows that money can buy success in America when you’re able to purchase officials and write your own rules. This trend isn’t going to slow down either.
ARE WE IN A TECH BUBBLE?
LinkedIn Corp.’s (NYSE:LNKD) stock is through the roof.
Twitter Inc. (NYSE:TWTR) opened its IPO with an 80% gain.
There have been multi-billion dollar valuations for small, unprofitable companies and soaring share prices for tech names like Facebook Inc. (Nasdaq: FB).
The tech-focused Nasdaq Composite Index is up 31% so far this year. It’s up 207% from its financial crisis lows of March 2009. Compare that to the 22% gains this year and 142% gains since 2009 of the Dow Jones Industrial Average.
These numbers lead to one serious question – are we in a tech bubble?
Our technology and defense specialist Michael Robinson joined Fox Business’ “Varney & Co.” to answer that very question. And based on the research he did this week, his answer may surprise you…
Be sure to watch the interview here, and learn about a few companies that Michael has his eyes on for the road ahead.
DRINK UP THESE PROFITS…
One under-appreciated commodity sector is a $500 billion a year business – and set to surge to $20 trillion by 2025.
By then, this global sector will outgrow the size of the $17 trillion U.S. economy.
That business is water.
With the global population on the way to 9 billion, access to clean, affordable water is already a serious problem.
Our David Zeiler pointed out this week that 783 million people lack access to fresh water, while 2.5 billion (more than 30% of the world’s population) lack basic sanitation. As we approach 2025, the World Water Organization estimates that demand will exceed supply by 56%.
This is pretty startling.
Meanwhile, in cities across the United States, our water infrastructure is sorely outdated. For example, New York City is still operating with pipe systems dating back to the beginning of the 20th century. Every day, its hotels face shutdowns, water main breaks are common, and the only solution is patchwork. Sooner or later, the entire city is going to have to fix this problem.
The conservative cost estimate of repairing, replacing, and updating New York State’s drinking water infrastructure is $38.7 billion over the next 20 years, according to its Department of Health.
There is going to be a very big surge in infrastructure in this sector. That’s why we see water stocks as one of top profit opportunities of the 21st century. But don’t just take our word on it.
Renowned economic think tank McKinsey Global Institute is predicting a surge in infrastructure spending from roads and bridges to water pipelines and sanitation systems. The think tank says that the U.S. government and states have to update these systems and add billions in spending because it is leaving the U.S. at a competitive disadvantage.
Be sure to check out Money Morning here for the best play in water infrastructure.
Since we told you about this company back in February, the stock is up 57% and is poised for even greater growth as the U.S. ramps up its water infrastructure spending.
THIS WILL BE ENTERTAINING…
Every now and then, Americans elect someone so detached from reality that the only thing we can do is get the popcorn ready and watch as their political theories lead to calamity. It’s happened on the far right before… but this time, Seattle has really outdone itself on the far left.
Last month, voters in Seattle elected Kshama Sawant, an avowed Socialist in every sense of the word. She ran openly with the designation, and voters embraced her. It is the first socialist that Seattle has elected to its council in 100 years. Now, buyers’ remorse is already kicking in.
It didn’t take long for Sawant to flex her theoretical mind and showcase what Seattle will have to put up with for the duration of her term.
She supports efforts to raise the minimum wage to $15, which in theory would make wealth more distributive, but never, ever works as intended and fuels greater adoption of automation and increases to teen unemployment. She has called for rent control in the city where rental prices keep climbing, a practice that ultimately leads to a reduction in new housing supply and property upkeep. Finally, she supports a tax on millionaires to help fund a public transit system and other services. Of course, we live in Maryland, and the recent millionaire’s tax passed by Governor Martin O’Malley has led to thousands of millionaires leaving our state.
You can expect a similar migration in Seattle.
And now, Sawant is even thinking about getting into the airline business. Here’s what happened.
Over the last year, The Boeing Company (NYSE:BA) has been in a serious contract disagreement with its machinists’ union. Boeing is trying to cut guaranteed pensions for new union members, and the machinists are refusing to accept the deal in exchange for eight years of guaranteed work on the 777 airliner.
The company recently sold more than 250 of its 777 aircraft, the largest combined order for a new aircraft in the company’s history. Now it’s time to fill those orders.
The union wants the pensions for new members (the agreement doesn’t impact existing pensions), and Boeing is now threatening to move to South Carolina, a right-to-work state.
That threat sits well with Councilwoman-Elect Sawant. Her solution: Unleash the proletariat!
“The workers should take over the factories, and shut down Boeing’s profit-making machine,” she told union supporters. She added that taking those jobs to another state would be “nothing short of economic terrorism because it’s going to devastate the state’s economy.”
Of course, economic terrorism isn’t seizing private property, in her opinion. She continued: “The only response we can have if Boeing executives do not agree to keep the plant here is for the machinists to say the machines are here, the workers are here, we will do the job, we don’t need the executives. The executives don’t do the work, the machinists do.”
Sawant believes that the machinists can just take over the company and run Boeing, an $81 billion company with more than 169,000 employees. Who needs executives? Sure, the machinist union could technically take over the plant. But that’s private property owned by the company.
And they could build planes, but where are they going to get the raw materials? And the capital, billions of dollars needed, to build these planes? And who will be the customers? The machinists aren’t the designers of the planes, so they’ll need design engineers. Who will run the human resources department of this newly minted utopian company that doesn’t seek profits?
These are the questions that Sawant doesn’t ask. But this is the mindset of every centralized planner. That they, through sheer tyranny of will, can take over a factory and create a better product than the capitalist, even if they have no experience at all. Take away the profit incentive, and what motivation should people have to build a plane? I would argue practically nothing…
And customers would probably cancel those 777 order and take their business to Airbus S.A.S.
Of course, Sawant has a solution to that problem as well. “We can re-tool the machines to produce mass transit like buses, instead of destructive, you know, war machines.”
Yep, Boeing 777 passenger airplanes are war machines in her mind. And in this one naïve sentence, she proves exactly why executives are needed for a company. Machinists can’t retool entire factories with no experience in mass-transit vehicles. The executives are necessary to retool plants, to build supplier and customer networks, to understand the market for buses and mass transit systems, and to take part in everything else that comes with running a company from finance to marketing.
It’s going to be a long few years for the people of Seattle.
SPEAKING OF CENTRALIZED PLANNING
We’ve done our best to only talk about Obamacare when it comes to your finances. With a slew of taxes coming down the pipeline, it’s important that you are able to get your budget in order, because the cost of the new, improved, “affordable” care is much more expensive.
If you liked your plan, you can pay up to 200% more for another plan.
If you liked your doctor, be sure to send them a nice card to celebrate their retirement.
Doctors are already starting to head to the exits, highly upset that they will receive far less for payments to care for millions of new patients.
But there is one number that I wanted to share that really speaks to the unintended consequences of this law. As you know, the law orders that companies with 50 or more employees who work more than 30 hours a week must provide healthcare to its work force. The “50 worker” figure is just as arbitrary as the “30 hours” number, but due to this law, every company in America is looking to reduce its costs. The solution is to hire more part-time workers.
America is fast-becoming a part-time nation.
Seven out of every eight jobs created in the U.S. since the passage of the “Affordable Care Act” has been a part-time position with fewer than 30 hours per week.
Meanwhile, Congress and the President can’t understand why unemployment is stagnating, wages are declining, and fewer full-time positions are available.
Perhaps they should take a look at the rules they wrote and realize that for every action in Washington there is a reaction on Main Street.
THREE ARTICLES YOU CAN’T MISS
Keith Fitz-Gerald, Chief Investment Strategist, Money Map Press
Successful Investing: Five Things to Do Before 7 A.M. Every Day
Not a morning person? Performance expert Tony Schwartz says that less than 10% of the population has unchangeable biorhythms. This means you can train yourself to get up – and get ahead. But what to do? Here is a list of five things to do before 7 a.m. This can change your life…
Robert Hsu, Global Investing & Income Strategist,
Your “Uncle” Is the World’s Smartest Trader
It’s interesting that an investor in the “communist” Peoples’ Republic of China can make millions tax-free… while investors in the United States – the supposed bastion of free enterprise and capitalism – have to pay, in some cases, a near-50% tax on investment gains. Now, Robert doesn’t mind having Uncle Sam as a silent partner, but like any good partner, the tax man should stick around to help shoulder losses as well. Unfortunately, this isn’t what happens….
Peter Krauth, Resource Specialist, Real Assets Returns
Gold’s Shocking New “Pick and Shovel” Play
After thousands of years of digging for gold, the low-hanging fruit’s already been picked. Most remaining deposits are becoming increasingly difficult to find, and increasingly low grade.
Now, a surprising, brand-new gold prospecting tool may be in the offing – one that’s far less technologically demanding, and much less invasive. It seems nature itself has found a way to extract gold from the ground. Take a look at this picture… and then profit from this new trend.
Please drop us a note at Dispatch@MoneyMapPress.com if you have any feedback or questions you’d like us to address next week.
We’d love to hear from you.
Until next week,
Mike