The Daily Reckoning October 11th


Could the Government Get a Mortgage?

Mortgage credit is tight, and extremely so.

Romney and Obama were even questioned about it in their first debate. Think of all the potential issues that presidential candidates might address–fiscal cliffs, budget deficits, mass unemployment. That they were even asked about this matter illustrates how much government sponsors and supports the nation’s housing market.


People want to borrow and government wants them to borrow. Ben Bernanke wants everyone to refinance, like he did in 2011 when rates were around 4.25% (and likely will again now that mortgage rates are in the 3.5% range).

But if you’re not the Chairman of the Federal Reserve, making a $200,000 a year in salary and $150,000 a year in book royalties, it’s tough to convince mortgage lenders to lighten up and give you a loan.

The banks are still licking their wounds from the credit crisis and regulators are breathing down their necks.

Mitt Romney puts the blame on provisions in the Dodd-Frank bill requiring that lenders obtain sufficient evidence proving that borrowers can actually afford the mortgage for which they are applying. If loan files lack this evidence lenders face stiff penalties.

Lenders would rather be safe than sorry, especially since, as Romney pointed out, “It’s been two years. We don’t know what a qualified mortgage is yet,” he said. “So banks are reluctant to make loans.”

Federal Reserve Governor Elizabeth Duke on Friday said she was “really, really worried” about the cumulative effect of having one mortgage lending regulation on top of another. She fears that “you’ll get to the point where the only loans that get made are the loans that fit in every single angle of the box, and that’s going to be a very small number of loans.”

Some question whether the threat of more regulations is really stifling loan production. But the proof is in the numbers.

The cleverly named Ellie Mae, a mortgage software provider, says the average loan applicant denied for mortgage credit in August had a credit score of 734 and was willing to put just shy of 20 percent down towards the purchase.

At any other time in history, this would be a slam dunk. Not so today. Lenders are too skittish. If something goes wrong, the potential penalties are extreme. Therefore, the average citizen can’t get a loan.

Here’s the interesting question. How does the government stack up with the credit scoring agencies?

Nick Colas with ConvergEx went to and he checked this out. He tried to figure how the U.S. government would come out if lenders scored its credit report. There are 10 questions to answer.

To the question of how many credit cards the applicant has, Colas answered “5 or more.” When did the government receive its first loan? He answered, “More than 20 years ago.”

How many loans or credit cards have you applied for in the past year? Colas was conservative and answered “6 or more.”


He answered “more than 6 months ago” to the question, “How recently have you opened a new loan or credit card?” Nine or more is the answer to how many loans and credit cards have balances.

Colas checked the box denoting the highest possible amount of credit card debt–$20,000. Uncle Sam can check the box indicating that he’s never missed a payment and can indicate he has no loans past due.

With federal government borrowing so close to the statutory debt limit, Colas checked the 90-99% box for what percent of credit limits do your balances represent.

And finally “no” was the answer to whether the applicant had filed bankruptcy, had property foreclosed on or repossessed, or had an account referred for collection.

The fact that the Federal Reserve can create money out of nowhere to pay the government’s bills makes many of these positive responses possible. Forget about China and Japan, last year the central bank bought 61% of the U.S. Treasury market.

Besides the money-out-of-nowhere advantage, FICO places a big premium on past payment history. Plus, less than a third of a credit score is determined by the amount of debt owed. The government’s total debt of $16 trillion should give FICO pause. Also, FICO doesn’t subtract from the government’s score for its preponderance of short-term borrowing. This on-going rollover risk should subtract a few points but doesn’t.

Also, if Uncle Sam were in front of a lender, he would have to explain, somehow, that he can only makes ends meet by borrowing a third of his annual outflow. Any typical mortgage applicant would be laughed out of the lender’s office with such an admission.

Based upon the answers to the ten questions, the U.S. government credit score came out in a range between 630 and 680. That’s a bit below the average American’s credit score of 690. Uncle Sam might qualify for a car loan. But he can forget about qualifying for a mortgage. Yet, the U.S. government is borrowing money for 30 years at 2.93%.

The U.S. government is a borrower whose operation Boston University professor Laurence J. Kotlikoff refers to as a Ponzi Scheme. Using CBO data, Kotlikoff calculates a fiscal gap of $202 trillion, which is more than 15 times the official debt. He goes on to explain,

We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

When the fiscal chickens come home to roost, the results won’t be pretty. Kotlikoff predicts “dramatic increases in poverty, tax, interest rates and consumer prices.”

Bankers are thought to consider credit requests considering the 5 C’s of credit:Cash Flow, Collateral, Capital, Character, Conditions. While creditworthy John Q. Publics pass the 5 C’s with flying colors, they’re getting no respect from their local banks.

Meanwhile, the U.S. government has a negative cash flow. It provides its lenders no collateral. It’s capital is eroding. Character? Oh please! Plus, economic conditions are terrible.

Turning a blind eye to the 5 C’s, bond buyers can’t get enough of America’s government paper. But rest assured, as Kotlikoff writes, “Uncle Sam’s bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.”

In our economic world of illusion, from time to time we get a dose of reality. The government can’t protect itself from reality forever.

Douglas E. French

Original article posted on Laissez-Faire Today

Could the Government Get a Mortgage? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

S&P Downgrades Spain’s Credit Rating Two Notches

Good day… S&P surprised the markets after the US close yesterday and announced a 2-notch downgrade for Spain taking them to BBB-, and didn’t stop there, S&P also announced that Spain was being placed on Negative Outlook. This really took out any wind that existed in the euro’s sails, and made for an ugly Asian session.


Here’s the skinny on what’s going on here… S&P had basically joined Moody’s and Fitch in this downgrade, and another Moody’s rating cut could come by the end of November. IF that happens, then Spanish bonds would have to be dropped from bond indices around the world, and if that happens those bonds will have to be sold. So, now you see why the euro (EUR) saw the ugly side of trading in the Asian session last night.

But then the Asian session rolled into the European morning session, and the euro bounced back, on the good results of an Italian bond auction. The euro has bumped up 0.25% since I’ve come in this morning, and is back to 1.29. So, this is a prime example of what I always say about traders’ attention spans.

I told you yesterday that Australia would print their employment data late yesterday, and of course they did. The Aussie employment data showed an increase of 14,500 net new jobs, and the Aussie dollar (AUD) bounced higher, as the consensus for new jobs was only 5,000. Full time employment in Australia, which had recently been slow, had a strong month in September. So, the last two days we had stronger-than-expected job growth, and good consumer confidence reports. Maybe this will cause the traders that are pushing for rate cuts to back off. Probably not, but at least we can hope.

I told you yesterday that I thought, even though the markets didn’t, that the Brazilian Central Bank (BCB) would cut rates 25 Basis Points (0.25%) and that’s exactly what they did! I had someone, presumably from Brazil take offense with what I said yesterday that the Brazilian government and BCB had distastefully cut rates by nearly 5%… This fellow thought that the Brazilian government and BCB were cutting rates to help the citizens. Well, let’s listen to what Brazilian Finance Minister, Mantega had to say about the latest rate cut. “The reduction in rates will help avoid the appreciation of the real by reducing arbitrage.” THAT has been the true reason for the rate cuts, to debase the currency, to lessen the flows into the country that pushed the real (BRL) higher.

Speaking of Brazil… Mantega also made an announcement yesterday at the annual meeting of the IMF. Mantega announced that the BRICS (Brazil, Russia, India, China, S. Africa) have agreed to create a pool of reserves to provide a rearguard of financial support. He said that this pool of reserves would be modeled after the Chiang Mai Initiative for Japan, China, S. Korea, and 10 S.E. Asian countries that have pooled $240 billion of emergency liquidity to fill any gaps and help smooth out global financial shocks.

These are just pledges, folks. They don’t really put the funds in the pool up front. They sign an agreement that promises they will provide “X” should the time come. It is believed that the BRICS will iron out the details of this pool of reserves at their next meeting in Mexico next month.

The poor S. African rand (ZAR), has really been put through the wringer in recent weeks. The mining strikes just crippled the economy, and the rand was sold. But the past three trading days have seen some sun shine on the rand, as the labor unrest eases, and flows of investments into S. Africa are returning. I’ve always said that the rand is just too volatile for my taste, and the only way to buy is with the speculative portion of your investment portfolio, or in a basket so other currencies can smooth out the volatility.

I’m not sure how to take this quote from US Treasury Secretary Geithner… He is in Tokyo for the IMF Annual Meeting, and had this to say about the Eurozone’s progress with their debt crisis. “The region has a much more viable strategy to hold the system together. It’s a much more powerful and promising path. They are better off today than they were before they reached agreement. The basic strategy is right and good.”

Long time readers know that the US Treasury Secretary isn’t at the top of my Hit Parade. I can’t talk about him like I used to, but just to remind everyone what the root of my feelings are. The US Treasury Secretary was the head of the Fed NY, before the financial meltdown. The Fed NY was responsible for a lot of policies that didn’t get followed by regulators before the meltdown. And, something my old friend and former colleague taught me many years ago, the regulators might have been responsible, but the top guy was accountable. And that’s all I’ll say about that… But now, you can see why I shudder when the US Treasury Secretary praises the Eurozone’s debt crisis plan. It makes me think that there are glaring problems. But maybe I’m just being too cynical, eh?

In Japan overnight, more gloom, despair and agony for the Japanese economy. A leading indicator of capital spending, orders for machinery, fell -3.3% in August from the previous month. Add this to the recent reports that exports and industrial production are in decline, and you’ve got an economy that barely has a pulse. Which is why I have long questioned the strength of the Japanese yen (JPY). The Japanese, from day one of their now 2 “lost decades”, did what we are trying to do now — artificially stimulate an aged economy. It didn’t work for them; I wonder why we think it will work for us? I mean, I get it, the Japanese save, and we spend; that’s what makes us different in this arena. But, we can’t spend when we don’t have jobs (well we can as long as the government keeps mailing the checks or credit cards, but eventually that runs out!)

Sweden saw their Consumer Price Index (inflation) slow down in September. CPI was +0.4% versus +0.7% in August. This is very good fundamentally for Sweden, but, I’m afraid the central bank/Riksbank will view this as an opportunity to cut rates, or at least leave them unchanged, and reverse the earlier indication that rates would rise here. And that’s not good for the krona (NOK).

But remember, the Swedish krona (SEK) and the Norwegian krone, are not a part of the euro, but at this point in time, seem to get tarred with the same brush used on the euro. I truly believe that will change at some time in the future, for like I’ve said over and over again, eventually investors and traders will see that Norway’s fundamentals (and Sweden’s) are not the same as the euro.

Gold is up $8 this morning, after seeing selling the past two days. There was nothing to cause the selling the past two days, so it’s nice to see gold get back on the rally tracks. Silver is up 28-cents to $34.27, so it’s also seeing a strong performance this morning. The S&P announcement on Spain probably has a lot to do with the return to the rally tracks.

One of the things I always talk about in my presentations when I talk about gold and silver, is the fact that there is only so much of either one. Which is a great reason why the prices of these metals should always be strong. I saw this data on silver and thought it played well with that thought. US mined silver output was down 12% in July, compared to July 2011. And with the gold and silver ETFs now demanding so much physical metal to back their funds, you have to wonder about mining and production.

Then There Was This… From (one of my fave websites to visit). This is an article posted by the chief investment officer of Guggenheim Partners in New York and Chicago, Scott Minerd, who concentrates on an angle often raised by Jim Sinclair, the (purported) US gold reserve’s “coverage ratio” of the US money supply.

Minerd writes: “The US gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17 percent. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40 percent, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100 percent twice during the 20th century. Were this to happen today, the value of an ounce of gold would exceed $12,000.

“Well, dear reader, my guess currently stands at $18,000/ounce, so the estimates are getting closer. But if gold only makes it to $12,000/ounce, I’m sure I’ll manage somehow…as silver will be many hundreds of dollars per ounce…and the ‘new’ gold.”

Chuck again. WOW! Those are some lofty figures being tossed around in that article! I remember when the Big Boss, Frank Trotter and I would talk about the price of gold, back when it wasn’t even $1,000 and the thoughts were that gold could go to $2,000. We would agree that while for gold holders $2,000 would be great, we worried about what the US economy would look like. I think we’re getting to see that real time, eh?

To recap. S&P surprised the markets with a 2-notch downgrade of Spain’s credit rating. This caused all kinds of problems for the euro in the Asian session, but the single unit has rebounded in the European session on the news that Italy had a very strong bond auction this morning. Brazil did cut rates 25 basis points, and announced a new pool for the BRICS that will be modeled after the Asian reserve pool.

Chuck Butler
for The Daily Reckoning

S&P Downgrades Spain’s Credit Rating Two Notches appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Occupy Wal-Mart?

Eighty-eight people out 10,000 isn’t much… unless it’s the leading edge of a new and more potent phase of the Occupy movement. At least that’s the thought that crosses our mind with the Wal-Mart strike.

You haven’t heard about it?

You’re not alone.

The Wal-Mart labor strikes since they began a week ago today. They made The New York Times yesterday… on page B2.

Why do we care?

Entertainment value: Major labor unions are backing an effort called “Making Change at Wal-Mart,” a company that’s successfully kept unions at bay throughout the company’s 50-year history. Those 88 workers who walked out Tuesday are spread across 28 stores in 12 states.

Organizers sent 200 employees to WMT’s shareholder meeting in Arkansas yesterday, demanding an end to the company’s attempts to “silence and retaliate against workers for speaking out for improvements on the job.”

Candidates for Wal-Mart’s new banking venture?


Maybe it won’t amount to anything… but the unions are talking about a “combined protest and educational campaign” on Black Friday.

Meanwhile, the evil capitalists who manage Wal-Mart are making a foray into the banking business.

The world’s largest retailer is teaming up with American Express to create a prepaid debit card called Bluebird. Deposit a paycheck at any Wal-Mart cash register, load it up on your Bluebird card. Or leave the money on deposit and use the card at any ATM in Amex’s ExpressCash network. Next year, even check-writing privileges will be available.

We like this idea. The deposits won’t be FDIC insured. Nor are Wal-Mart and Amex likely to take their customers’ money and blow it on collateralized debt obligations.

Addison Wiggin

Occupy Wal-Mart? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Downside of Mathematics

We also have a way to vastly increase US household income — the feds have only to spend more money! Just add zeros. How about that? The poor family has not a dime more in real, spendable income…but we’ve managed — by clever use of mathematics and economics — to double its income.

But that illustrates the nature of modern economics. It is all numbers…and none of them mean anything. And none means less than the zero.

I’ve always been especially suspicious of the zero. It is a number. But a number is ‘something.’ The zero, on the other hand, is supposed to represent nothing. Well, which is it? Something or nothing? Nothing, right? But how can something be nothing? You say you have zero tomatoes. And you tell me zero is a number, used for counting. But how can you count tomatoes that aren’t there? You’ve either got tomatoes or you don’t. Zero tomatoes is a contradiction. It’s oxymoronic.

And if the zero is actually nothing, how come you can put it after a number…and suddenly you have 10 times as much? Or, put it in front of a number…and you have 1/10 as much. How can nothing do all that?

Now if I have 3 tomatoes and I add zero tomatoes, I have done nothing. I still have three tomatoes. But if I multiply my 3 tomatoes by zero, suddenly, I don’t have any tomatoes. If zero is nothing, I want to know what happened to my tomatoes.

We didn’t have the zero for thousands of years. As far as I know, we got along fine without it.

Numbers are a trap for economists. They make it look like science, but it is not science. Far from it. Initial conditions can never been controlled or fully understood. Instead, they are infinitely complex. Nor can results be reproduced. Nor can hypotheses ever be disproven. That’s why economists can cling to dopey ideas for centuries — they can never be disproven.

Using numbers, economists pretend to tell you something they don’t really tell you, often something they can’t possibly tell you. The unemployment rate, for example.

The Bureau of Labor Statistics uses numbers like make-up. Put on enough of them, and you can make things look good…as long as you don’t look too closely. Behind every number is a wrinkle… Small numbers hide small ones. Big numbers hide big ones. A big number, such as the unemployment rate, has a Grand Canyon of wrinkles hidden behind it. There are the statistical adjustments…seasonal adjustments…and enough arbitrary definitions to make a corpse look good.

BLS says that 7.8% of the workforce is unemployed. Simple enough. But what does it mean? What’s the ‘workforce’? And what does it mean to be ‘unemployed’? Think of all those people who work for cash…like the Latinos you pick up at gas stations for day work. Are they unemployed? How about the guy who couldn’t find a job, so he went back to school? Is he unemployed? What about the housewife who would like to find a job…sort of…but isn’t actively looking for one? Are these people part of the workforce?

It’s obvious that you can change the assumptions a bit and change the reported unemployment rate a lot. When statistician John Williams looks at the US data, for example, he comes up with a real unemployment rate of 23% — almost as high as the jobless rate in Spain.

And yet, the BLS tells us that US unemployment is 7.8%. Not ‘around 8%.’ Not ‘less than one in ten.’ But 7.8% exactly. And yet, there are so many greasy assumptions lurking in the cracks of this number that it is not only completely unreliable and practically meaningless, it is the downside of mathematics. It pretends to tell you something…but once you have taken it in you know less than you did before, because what you think you know is largely a fraud.

The exact number of people who want a job and can’t get one is unknowable. It is unknowable because the people concerned don’t know it themselves. I saw a bum on the street in Baltimore the other day. He stopped me and asked if I could spare a dollar.

I said I couldn’t give him a dollar. “Free money could adversely affect your moral character development,” I explained.

Instead, I offered him a job. I had some work to do around the office; I thought I was doing him a favor. What do you think he said?

It begins with an “F”.

Now, should that man be counted as unemployed? He certainly didn’t have a job. But if you offer a job to most people…what will they say? They’ll reply — maybe. Because it depends on a lot of things that even they don’t have the answers to. How much will they be paid? How many holidays will they have? How far will they have to commute? Will they get health benefits?

And those are just the obvious questions. If you’re considering taking a job you also have to think… ‘What are my other options?’ ‘Could I make more without working?’

‘Maybe I should start my own business instead.’ Or, ‘Let me see if I can get on disability, first…’

That’s why the old economists thought it was absurd to try to calculate an unemployment rate. It was just an empty number. And it was even more absurd to try to ‘increase’ employment. As long as buyers and sellers of labor were both free to make a deal, there would never be any ‘unemployment.’ There would merely be people who, given the current bid, decided to withhold their labor from the market.

The old economists knew their limits…all they could do was describe the conditions under which people had jobs…and come up with some general rules and principles that explained why some people had jobs and others didn’t. But you could not say with any precision how many people were unemployed.

But today, economists tell us not only how many people are looking for work…but what to do so that more of them find jobs. How? The easy slight-of-hand would be to redefine what the workforce means…reduce the workforce and you automatically increase the employment rate. That’s what economists and their numbers can do for you. During the Obama administration a record number of people left the workforce, substantially lowering the unemployment rate.

But now if you want to get your face on the cover of TIME magazine as a hero of some sort, you’ve got to come up with some other, craftier subterfuge. How about this… Raise the taxes on overtime pay! This is exactly what Francois Hollande has done in France. He says it will increase employment. And he’s probably right. Because now it is more expensive to pay someone to work overtime than it is to hire someone new. So, with a little luck, the unemployment numbers may look better in France.

Is that good? Are people better off? Who knows? The numbers certainly don’t tell you.

In America, they’ve kept the jobless numbers down by lending people money to go to school. So, instead of people officially counted as unemployed….people are counted as students. They load them up with debt — student debt is now over $1 trillion. Now, when the young person finally gets out of school, his job prospects may still be uncertain, but his debt is undeniable. Is he better off? Is anyone better off? Has any improvement been wrought?

The numbers are not silent on the matter. They lie at the top of their voices.

Probably no numerical grease is thicker and less transparent than the GDP. There, the numbers dissemble and mislead, just like economists’ other numbers.

Here’s a story from The New York Post:


They take a limousine to McDonald’s, own his-and-her Segway scooters and have designed their new house with 23 bathrooms, each equipped with Jacuzzi tubs.

Time-share magnate David, 77, and his beauty-queen trophy wife, Jackie, 46, were already Orlando’s gaudiest couple when they decided to open their doors to filmmaker Lauren Greenfield as they broke ground on a 90,000-square-foot monster home with a 120-foot Grand Hall modeled after France’s Palace of Versailles.

It’s bigger than a 747-jet hanger. Designs include three swimming pools, 10 kitchens, a bowling alley, a skating rink and a garage that fits 20 cars. The home’s mahogany doors and windows alone cost $4 million.

“We never sought to build the biggest house in America,” Jackie says in the film, titled The Queen of Versailles. “It just happens.”

It has been described as tacky, trashy and tasteless, with the top three floors inspired by Las Vegas’ Paris Hotel.

Trashy? Tasteless? In 2012, the biggest house in America sat unfinished. It may never be finished.

But hey, it added to the GDP!

GDP numbers are a complete scam. They don’t tell you if you’re coming or going. They don’t tell you if you’re getting richer or poorer. This is another way that numbers fail. They can only measure quantity. Or speed. Here’s an example. An article ran in the Wall Street Journal last month. It explained how Italy’s economic growth was retarded by strong family attachments. Half the young children in Italy are raised by their grandparents — their ‘nonni’ — while their parents work. Instead of going to day care centers, the kids go to their grandparents.

How does this affect an economy? There is no exchange of money when the grandparents do the day care. So, it doesn’t register in the GDP. No exchange of money, no ‘growth.’ The article also went on to say that people were reluctant to leave their hometowns to seek work elsewhere because they relied on the family for childcare. Theoretically, a mobile population increases GDP too…GDP increases when people take new jobs, move, buy houses and furniture, sign up for health clubs, day care and so forth. All these things add to GDP growth, even though they do nothing to really increase quality of life. They are a kind of phony growth. GDP looks only at the quantity and velocity of money transactions, not the quality of them…nor the quality of life they produce…nor the real wealth of the people in an economy.

I cut your lawn. You mow my lawn. We pay each other. The GDP goes up. The more transactions per person per year — the greater the GDP of a country.

Is anybody better off? What really have the numbers told us? Has one single extra lawn been mowed? One single extra blade of grass cut down?

No, right? So, if a number…the GDP growth number…tells you that you’re growing…and you’re not really growing…what good is the number? It’s a flimflam. An empty number. There’s no good information in it. It’s like the unemployment number. Empty. Hollow. A zero. And so are almost all the compound, formula-driven numbers used by economists. They are dishonest. Their only role is to tart up economists’ confections and make it appear that they can do things they can’t really do. They are designed to make economics look like engineers, working on the economy as though they were real technicians preparing a moon launch.

But if these guys were building a bridge, none of us would want to drive over it. If they were building cars, we wouldn’t buy them. And if they were running the phone company, and we needed a telephone number, we could call “Directory Information;” they’d estimate it for us.


Bill Bonner,
for The Daily Reckoning

The Downside of Mathematics appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

U.S. Oil Passes The Torch…Two Hotspots Set To Profit!

A few weeks ago I told you about a shocking statistic coming from the U.S. oil patch.

Back then, I was rustling through domestic production data and realized Alaskan oil production, – once the provider of nearly 25% of U.S. oil supply – has fallen off a cliff.

Today, I have updated numbers. And as you’ll see, this profitable situation has only accelerated…

Back in mid-September when I first told you about this story, I was shocked to see that Alaskan production had fallen under 500,000 barrels per day and sat at 493,000bpd.

To put that number in dire perspective, back in the late 80’s Alaska was pumping out over 2 million barrels per day – accounting for over 24% of domestic production.

Today, with updated numbers from the U.S. Energy Information Administration (EIA), it’s clear that the situation has gotten even worse. Production data now show that Alaska’s oil output has fallen to a mere 415,000bpd, which represents a 78,000bpd drop in a month.

Talk about big news, that’s the lowest oil output we’ve seen from Alaska since July, 1977. Natural depletion is, indeed, a b*tch!

Luckily for us, this situation has a profitable outcome.

You see, while Alaskan oil production continues to recede, production from new unconventional oil sources has increased dramatically. It’s a passing of the torch. While this conventional oil source – what Byron King refers to as the “easy” oil – slowly declines, unconventional oil is starting to fill up U.S. pipelines.

This unconventional oil (also referred to as “tight” or “shale” oil) is creating massive profit opportunities right here in our own backyard. In fact, the Alaskan depletion is actually making these shale sources even more profitable, acting as a crutch for current prices.

Two Hotspots Set To Profit…

Right now there are two hotspots I’d urge you to focus on: North Dakota’s Bakken oil field and the Eagle Ford in southern Texas.

The reason these two deposits offer the most immediate profit opportunity is found in the same data set that alerted me to the Alaskan fall-off.

While Alaskan production has fallen more than 165,000bpd in the past 6 months, production for North Dakota is up 115,000bpd… and Texas output increased a whopping 161,000bpd.

The speed at which these two unconventional oil plays are bringing supply online is amazing – and with prices above $90 a barrel (thanks in part to Alaska’s shrinking supply) it’s also very profitable.

With breakeven costs (the cost it takes to get the oil out of the ground) for unconventional oil at a ballpark estimate of $50-60 per barrel, every day that the price of oil stays above $80, $90, $100, fast-moving producers in these energy hotspots are raking in extra cash.

That’s why domestic oil presents such an inherent opportunity for investors today. There’s nothing slowing down efficient companies. North Dakota and Texas are increasingly friendly to drilling. And oil prices have support.

But at the same time there are plenty of reasons why global oil prices could head even higher. The most immediate of which is the still-simmering Middle East.


Your guess is as good as mine when the first domino will fall. But if violence erupts in the Middle East and if there’s any disruption to Saudi Arabia’s oil flow the price of oil will sky higher.

For gasoline and oil users this is bad news. But for domestic oil producers – those operating in the Bakken and Eagle Ford especially – this price spike could lead to an immediate windfall.

That said, let’s recap a couple of my favorite companies in each hotspot…

Eagle Ford in Texas:

EOG Resources (EOG) — EOG is the largest crude oil producer when it comes to unconventional drilling in the U.S. – by a margin of 2-to-1 over their closest competitor. That means they have drills spinning and more production than anyone in the unconventional game. They’re also a huge player with great looking acreage in the Eagle Ford. With $90 oil EOG is just adding to its bottom line.

ConocoPhillips (COP) – Looking at a map of the profitable oil/gas window in the Eagle Ford, you can see that Conoco (along with EOG) has an impressive acreage position – with a majority of the production coming in the form of oil and liquids. Conoco is ramping up production with 16 rigs spinning – and looks likely to continue paying its 4.6% dividend. COP is looking big in Texas.

North Daokta’s Bakken:

Statoil (STO) – Statoil bought big in the Bakken with the 2011 acquisition of Brigham Exploration. It’s been less than a year since Statoil acquired this Bakken acreage and the company has already hit the ground running. The Bakken acreage was a timely purchase and is already streamlined and ready to profit. With Statoil’s logistical prowess and ability to market their Bakken oil I expect increasing production numbers and cash coming in the door. Statoil currently pays a 4% dividend, so that cash can find its way directly to your portfolio.

Oasis Petroleum – One of the few pure-plays in the Bakken is Oasis. The company has nine rigs turning in the Williston Basin’s Bakken and 84 operated wells. Looking at a quarterly chart of production the trend since Q1 2010 has been a steady rise in production with only one pullback in mid-2011 – a solid track record, indeed. Plus, Oasis trades at a fraction of the cost of some of the bigger Bakken players like Continental and Statoil. This undervalued player has a strong upside.

There should be no doubt about it, I like American unconventional oil plays. Until there’s reason to stop, I’d keep a close eye on these hotspot opportunities.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

U.S. Oil Passes The Torch…Two Hotspots Set To Profit! appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

avatarThe Daily Reckoning - The Daily Reckoning posted Thursday, October 11th, 2012.

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