Thursday, June 29, 2017

Oil Prices and the $165 Question

One of the notable financial news stories heading into the Independence Day holiday is the continued drop of oil prices.  Since January, crude oil prices have moved from $54.08 per barrel to a recent low of $42.06 per barrel. A remarkable price drop of approximately 22%.   According to various pundits declining oil prices are supposed to be bad for the stock markets.  One highly regarded professor of economics and the financial markets put the price drop this way, “this drop could put some pressure on earnings estimates in the coming quarter”.   Earnings pressure in the energy sector for sure, especially companies  with a fixed cost to extract oil from the ground. 

The positives of lower oil prices far surpass the negative effects low oil prices.  The cost of virtually everything business and consumers come in contact with is impacted by oil prices. If you drive a car, the most obvious impact of changing oil prices is the retail price of gasoline. 

We often hear about oil or gasoline consumption in terms of millions of barrels per day.  This is a relatively meaningless piece of information for most people.  Bringing this to Main Street, American drivers on average consume 656 gallons of gasoline per year.   A $0.25 per gallon price change for example, is $165.00 per year, per driver.  That $165 may not sound like a lot.  When multiplied by hundreds of millions of drivers, the savings at the pump during periods of falling oil falling can put $50 billion into the hands of consumers and the U.S. Economy.   When spent, those dollars produce upward pressure on non-energy related company earnings

What will you do with the extra $165.00?

Tuesday, June 14, 2016

Musings in the Wake of Orlando

First, let’s not use his name again as some may use it to acknowledge a martyr. Referring to him as a dog or maybe just “Dog” is more appropriate. (Dog-lovers should bear in mind that, in Islam, to be compared to a dog is about the worst and most degrading insult.)
During the last 48 hours we’ve all heard descriptions, excuses and explanations to describe the murdering, wack-job shooter. Home grown extremism, radicalized, inspired by, directed by; does it really matter what when where or how? There is only one common theme, Radical Islam. What more needs to be said. However; I suggest the term Radical Islam is inadequate to describe those people. Radical Islam is a term mainstreamed from the Political Correctness dictionary. Merriam-Webster defines radical as: very new and different from what is traditional or ordinary; very basic and important; having extreme political or social views that are not shared by most people. By definition, those people have gone way beyond radical. While not a word in the English language, maybe we can create a derivative of the word genocide and call those people Genocidary Islam. Other terms are welcomed. Maybe deviant will work.
Those people have a history of attacking the west for the purpose of imposing their sick religious beliefs upon those they defeat. For the surviving society, they must conform and convert to Islam or die. In 732 the Franks (French) soundly defeated the Umayyad (Muslim) army as they attempted to invade Western Europe from Spain. In 1683 The Battle of Vienna took place. Vienna, known as the gateway to Europe was besieged by the 140,000 strong Muslim Ottoman Turks army. The city would have fallen if not for Polish army arriving to reinforce the defending army. The Ottoman Turks were decisively defeated and withdrew. The Turks never recovered from this battle, while the Ottoman Empire survived for another two hundred plus years, from here onwards it was merely a holding action. This victory freed Europe from the Ottoman Turks and their invasions and secured Christianity as the main religion in all of Europe.
Lost in history are the actions the Europeans took to prevent other invasion attempts. It is important to know Christianity was never spread at the point of the sword, and conversions to Christianity were never effected at the pain of death. But when the Muslim invaders were rolled back after a few centuries of occupation, the Christian re-conquistadors both in Spain and in the Balkans, followed a pragmatic policy of taking the war to the civilian Muslim population (many of whom were originally Christian) to either embrace Christianity, or leave the Christian lands, or to be put to the sword.
This ruthless European policy ensured that there remained no hostile population in the liberated Christian lands, who would betray the Christian army or in peacetimes sabotage the nation by acting as a Muslim fifth column in Christendom. Today the situation is reversed with the large and ever growing Muslim populations in Europe and the USA. Today’s rulers have forgotten the enlightened policy of our forebears of the days of the Reconquista and the Crusades. An enemy is an enemy, regardless of whether he is in the armed forces of the enemy’s military or is loyal to the enemy by reason of being a co-religionist. Thus an enemy civilian is also an enemy. This is the harsh reality that we Americans and Europeans need to face.
The Kumbaya Chorus wants to believe those people just need a job or to be understood, or just reason with them, or, or, or. The reality is those people’s only goal is to convert the World, not just the Middle-East to their version of Islam. Those who don’t denounce their own religion and convert are considered infidels. Infidel females are raped, sold into slavery, stoned to death and otherwise brutally murdered. The men, caged, burnt alive, crucified, thrown off buildings and the fortunate few spared a torturous death by beheading. Those people are living with 14th Century beliefs. To think they can be mainstreamed or brought into the 21st Century is Pollyanna. The only solution is relentless military action. As in Vienna the forces of the modern world must come together to purge the parasite into extinction

Thursday, May 5, 2016

OPEC The Floundering Cartel

Almost thirty-five years ago, President Reagan went to the British House of Commons and said “freedom and democracy will leave Marxism and Leninism on the ash heap of history.” Reagan chose his words carefully, using a phrase – the ash heap of history – very similar to the one used by the Russian Communist revolutionary Leon Trotsky against his political enemies. Within a decade, the Berlin Wall was no more and neither was the Soviet Union.

Now it appears OPEC, another nemesis of the US from the prior century is heading for the ash heap of history as well, not because of geopolitics, but because of the hard work of engineers.

A combination of fracking, seismic imaging, and horizontal drilling has led to a huge reduction in the cost of drilling and an increase in the supply of oil and natural gas, not just in the US but around the world.

Case in point: in the past twelve months the US has run an $8.4 billion goods trade surplus with OPEC, including Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. What a difference from less than a decade ago. Back in 2007- 08, the US ran a $190 billion goods trade deficit with OPEC. The reason for the change in the trade balance is that the US is importing much less from OPEC, $64.8 billion in the past twelve months versus $253.4 billion at the peak in 2007-08.

No wonder so many of these countries are in turmoil. They’re losing money and also losing the political leverage they used to have over the US.

Tuesday, April 12, 2016


After analyzing 70,000 corporate earnings reports dating back ten years, Bespoke Investment Group found that the overall beat rate of consensus analyst estimates was 62%, according to its own release. The beat rates for the major sectors were as follows: 69% (Technology); 63% (Consumer Discretionary); 63% (Health Care); 63% (Industrials); 61% (Consumer Staples); 59% (Financials); 59% (Energy); 56% (Materials); 55% (Utilities); and Telecommunications (49%).

Monday, March 21, 2016

Here's when you can stop signing your emails with 'best'

ou know how it goes. You begin the email to your boss, colleague, client, or HR director with a proper greeting. You cross your Ts and dot your Is, and you conclude the message with a formal signature such as “Best” or “Sincerely.” The email recipient responds with the same formality, addressing you in a standard greeting, and then writing out a couple of grammatically sound paragraphs before wrapping up the note with a similar signature; maybe it’s “Regards,” or the more casual, “Cheers.” Since that message requires a response from you, you continue to play along with what you think is the professional way — typing out the full greeting (again), composing the body of the message, and then concluding with “All the best, [Your Name].” You continue to do this after multiple back and forths even though it eventually seems totally pointless and even a little bit awkward. You’ve got to get good with ditching the formal speak Unless you work in a super stiff corporate office, where even exclamation points are frowned upon, you’ve got to get good with ditching the formal speak, particularly if communicating with your boss or colleagues throughout the workday is a frequent occurrence. As soon as it feels natural to scrap the “Hello, [Name of Person]” pleasantries and the redundant “Thanks, [Your Name]” goodbyes, do it. And to help you actually feel OK about doing this (and not like an etiquette monster), I’ve come up with a few guidelines. 1. Feel free to follow suit While it can be tempting to formalize all exchanges if it’s what you’re accustomed to or because it’s how you were taught, a lot of the time, it’s just not necessary. Pay attention to your workplace cues, or you’ll just end up sticking out. If your boss forwards you an email with nothing more than a note about taking a look to see if it’s of interest, and you reply with a formal message, I promise you, you’re not winning any brownie points — you’re only clogging up his or her inbox and ignoring how your team handles casual correspondence. Or, if your colleagues start communicating with you in a casual way (without addressing you by name or including an official sign-off), accept that as your sign to respond in kind. 2. Switch it up (depending on who you're talking to) Just because you reach a point where you drop the "best" with your manager doesn’t mean you should abolish the word from your vocabulary altogether. It doesn’t matter if your last boss made it clear that adopting an informal tone was intolerable; you’re not working for her anymore. Though, a word of caution, just because you reach a point where you drop the "best" with your manager doesn’t mean you should abolish the word from your vocabulary altogether. If you’re regularly speaking with someone you’ve never met and your relationship is more formal than not, don’t be so quick to sign off without including a proper closing, especially if you're on the fence about how to proceed. Erring on the side of caution will always be sound advice. Know this: Switching it up doesn’t just apply to different people. Even if a correspondence with one person starts out formally, you’re allowed to jump into the meat of the topic when you’re discussing an item across a long email thread — rather than bother with any greetings or sign-offs. 3. Consider timing If you go on vacation for a week and return to the office with a list of questions for your boss, who you haven’t spoken to or seen since you went away, it’s probably best to begin that first email back with a pleasantry such as “Good Morning,” “Hope you’ve been well,” or, if your manager was the one on holiday, “Welcome back” — even if you and your supervisor usually skip the greeting or small talk. Minding time lapses is also important for exchanges with outside clients or vendors. If you’re in touch once a week or just a couple times a month, it may be appropriate to start off the initial message after some time has passed with the go-to intro and the appropriate closing signature. A monthly touch-base with a senior member of your department may also require you to lean toward writing more conservatively. If that initial message results in a significant back and forth across a couple of days, then it’s probably fine to reduce the formal factor, especially if the other party has done so.

Tuesday, February 16, 2016

False Recession

With the S&P 500 down 10.5% through February 11th, questions about the health of the economy seem to intensify daily. The concerns typically go something like this:  If the financial markets are a predictor of where the economy is headed, has the plow horse finally lost traction?  Is a recession looming?  

An old joke says the stock market has predicted 19 of the last five recessions.  Stocks don't always lead the economy, and earnings clearly don't show that things are awful.  With 375 S&P 500 companies having reported Q4 earnings as of February 11th, 70.7% have beat estimates, although earnings are down 5% from a year ago it's all due to just one sector, energy. Of the 375 companies that have reported, only 23 of them have been energy. Excluding those 23 energy companies, earnings for the other 352 companies are up 1.0% from a year ago.  So, for those claiming the market drop is due to declining earnings, it seems more like an energy story than an economic one. It's plow horse earnings growth outside of energy, but it's earnings growth.

Saturday, January 16, 2016


Thanks to Brian Wesbury for this commentary.

To paraphrase the late Jude Wanniski – the history of man is a battle between the creation of wealth and the redistribution of wealth. Jude was a Supply-Sider, which means an economist who believes that entrepreneurship and supply (not demand) drives economic growth.

Jude didn't invent this. Adam Smith and Joseph Schumpeter, along with Austrian economists, Eugen von Böhm-Bawerk, Ludwig von Mises and Friedrich Hayek and the late, great Milton Friedman were all instrumental in the development of free market thought; the appreciation of entrepreneurship; and the importance of small government.

The other great contribution of the Austrians and Milton Friedman was in monetary policy. Friedman proved the Federal Reserve caused the Great Depression, while Ludwig von Mises talked of a "crack-up boom" – a money and credit-fueled boom that ended in a massive economic contraction and collapse. While Nobel Prizes have become a joke, both Friedman (for monetary thought) and Hayek (for proving Socialism fails) won them.

These thoughts were the intellectual underpinning of the Thatcher, Reagan, Wałęsa, and Clinton boom of the 1980s and 1990s. They also led to a USSR collapse.

Since then, a cottage-industry of copy-cat, Wiki-reading, blog-writing, pseudo-economists has sprung up. Fueled by a misunderstanding of 2008, these prognosticators, using selective excerpts from Austrian thinkers, have created an entire theory that the US economy today is in a "crack-up boom." The boom, according to them, has been caused by the Fed, QE and zero-percent interest rates, and now that the Fed has tapered and started hiking rates, it's over and a bust is on its way.

These ideas and forecasts find fertile ground because so many investors are still scared of 2008. They have "hypochondria" or "PTSD" as opposed to faith in free markets. And, if someone tells them the only reason stocks are up in the past seven years is because of easy money, and if there is plausible basis for believing this, many investors feel like the market could collapse at any moment.

And this is the nub of the matter. The pseudo-Austrians have focused almost solely on money; they've forgotten the entrepreneur. So, with the Fed tightening, everything becomes bad and requires some reaction by government. Falling oil prices (which should be viewed as a great supply-side success) are viewed as a demand-side (money) problem. China, which is a communist country, becomes a problem that government must manage. In other words, these so-called Austrian thinkers have, in effect, become demand-siders because they focus so much attention on what government is doing.

We view the world through Austrian and Monetarist thought processes, but we don't see anything like what the doom and gloom crowd does. We believe quantitative easing did not boost economic growth because banks shoveled that money straight into excess reserves. Even after the recent Fed tightening, there are still roughly $2.3 trillion in Excess Reserves in the banking system. This is the first Fed tightening in history that doesn't really reduce liquidity in the banking system.

We also believe new technologies, like fracking, 3-D printing, cheap and quick manipulation of the genome map, the cloud, apps, smartphones, faster communication and computer chips – in other words, good old entrepreneurship is driving profits and economic output inexorably upward.

And when we step back, the past six years suggests the creation of wealth is proceeding fast enough to offset the growing redistribution of wealth. The economy is not growing as fast as it could, but it is growing nonetheless. Ludwig von Mises called entrepreneurs "Angels." These Angels have been eking out a victory against big government. It's a small victory, creating Plow Horse growth, but there is no reason to suspect it has come to an end. Stay positive. Real Austrians do.