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What Really Goes on When the House Convenes |
One of our esteemed editors, Shannara Johnson,
sent me this fantastic picture yesterday.
Here we see House Minority Leader Lawrence F.
Cafero Jr., R-Norwalk (standing on far right) speaking while colleagues
Rep. Barbara Lambert, D-Milford, and Rep. Jack F. Hennessy,
D-Bridgeport, play Solitaire as the House convenes to vote on a new
budget.
Also, you’ll notice the guy sitting in front
of these two to the right is on Facebook and the guy behind Hennessy is
checking out the baseball scores.
I suppose it’s possible that this photo was
doctored. But I don’t believe so. I have too much faith in our
politicians. They are certainly smart enough to play Solitaire and
figure out how they are going to waste more of our money at the same
time. Give me a break…
With that mini-rant out of the way, I’ll turn
it over to Joe Hung, one of the top analysts on our energy team, for
some comments on oil.
Oil: Short-Term Bear, Long-Term Bull
By Joe Hung
On October 21, 2009, oil broke US$80/bbl for
the first time this year, more than double from the February low around
the US$35 mark. Here at Casey’s Energy Confidential,
Casey’s Energy Report, and Casey’s
Energy Opportunities, we are frequently asked for our
outlook on the price of oil.
Our response typically is this: we are
short-term bears on oil and believe in a general market retreat to knock
the price of the commodity back down, yet we are long-term bulls due to
the fact that we believe the supply of cheap oil is running out.
These two views are definitely not
contradictory. In fact, if we are correct (and we have every reason to
believe that we are), our subscribers will be able to grab the chance of
a lifetime when the price of oil dips down once again and ride the
upside that is inevitably to come. So first let’s look at our rationale
for being a short-term bear on oil:
1. Short-term equity markets
During a panic, as we saw in the past year,
all the boats in the water sink, not just the leaky ones. Quality
companies were trading below the cash they held in hand, and people
were selling indiscriminately. We do expect that the “second dip” of
the recession is coming soon, and at that time, commodities such as
oil that are intently tied with the industry of developed countries
will fall hard. As people reduce their risk appetite in the short run
during this panic, the U.S. dollar might have a short-term bounce,
which will again drive down the price of commodities that are
denominated in U.S. dollars, such as oil.
2. Near-term fundamentals
Looking at the OECD data from June, we see
that production is at 2007 levels, but consumption is down by 7.2%
when we compare June 2007 to June 2009. Inventories are also up by 200
million barrels since then. When we focus on the United States, the
numbers become more apparent. In July of 2009, the U.S. consumed just
581.9 million barrels, 9.5% less than 2007. In fact, the last time the
U.S. consumed so little oil in the month of July was back to 1997!
Inventories, though much lower than in the months of April and May,
are still much higher than their 5-year average. Clearly, in the short
term, we should see a retreat at least 10% below 2007 levels, which
would peg oil at US$65 within the next year.
Now let us look at why we think oil will take
off after this drop:
1. Diminishing supply of cheap oil
Unfortunately for the gas-guzzling world
that we live in today, the days of oil gushing out of the ground
hundreds of feet into the air are over. Today’s oil is getting harder
and harder to extract, as most of the easily pinpointed and extracted
oil has already been taken advantage of. The best deposits are now
generally now either locked in offshore waters (Gulf of Mexico,
Brazil, West Africa), or in politically unstable regions (Libya, Iran,
Iraq). Oil sands are another huge reserve, but they can be expensive
to extract (at least $30 a barrel). This means as we use more and more
oil, oil prices will be rising due to the increase in costs that are
involved.
2. The long-term depreciation of the
U.S. dollar
At the present, oil is denominated in the
U.S. currency. This situation could last for quite a while until the
other countries of the world agree to have it changed. This means if
the Federal Reserve continues with its expansionary monetary policies,
oil will continue to rise.
3. The emergence of developing
countries
Right now, the OECD (Organisation for
Economic Co-Operation and Development), the collection of most of the
developed nations in the world, account for about half the oil
consumption in the world. This number will decrease as countries like
China and India begin to raise their standards of living, thereby
increasing the amount of oil consumed by their denizens. This can only
be an upward, not a downward pressure on the price of oil, especially
combined with No. 1 summarized above.
So the conclusion is that though we view oil
as a go-to commodity to watch for in the future, in the short term it is
very vulnerable to pullbacks in the overall equity markets. We thus have
cautioned for conservatism in our energy letters, and use US$40 as the
basis for our analyses. If a company cannot be profitable at US$40/bbl
oil, it will underperform its peers even when oil is higher. This next
drop in the price of oil may be the best time to load up on high-quality
oil explorers and producers, and putting money in this sector could be
one of the best decisions in your investment career.
Chris again. Thanks Joe, very interesting
stuff.
Please note: At just $39 a year,
Casey’s Energy Opportunities is a great way to begin
building your knowledge of oil and the entire energy sector.
More here.
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However you decide to approach the energy
markets, the key point is to make them a part of your overall portfolio
planning. That’s because, regardless of everything else that’s going on
in the world, people and businesses need energy… and therein lies the
opportunity.
Poverty & Hunger Myths
It’s hard to scroll through headlines these
days without coming across stories about poverty and hunger problems in
the U.S.
Consider this recent article from the San
Francisco Chronicle:
1 in 6 Americans in poverty, new
formula shows
The level of poverty in America is even
worse than first believed.
A revised formula for calculating medical
costs and geographic variations show that approximately 47.4 million
Americans last year lived in poverty, 7 million more than the
government's official figure.
The disparity occurs because of differing
formulas the Census Bureau and the National Academy of Science use for
calculating the poverty rate. The NAS formula shows the poverty rate
as 15.8 percent, or nearly 1 in 6 Americans, according to calculations
released this week.
That's higher than the 13.2 percent, or 39.8
million, figure made available recently under the original government
formula. That measure, created in 1955, does not factor in rising
medical care, transportation, child care or geographical variations in
living costs. As a result, official figures released last month by the
Census may have overlooked millions of poor people, many of them 65
and older.
To read the entire article, click
here.
Never mind that the article completely
neglects to define what living in poverty actually means. But how bad is
it really? I admit I probably live a somewhat sheltered life, but are
things really that bad for so many?
Take the often quoted statistic that “one in
eight Americans is struggling with hunger.” Is this really accurate?
In his article, “Is America Struggling with
Hunger?” Jeremie T.A. Rostan answered where that “one in eight” comes
from and what it means.
To quote Rostan:
…The now-famous statistic comes from the
annual Food Security Survey (FSS) of the United States Department of
Agriculture. The first thing to point out is that this level of hunger
is not new: contrary to what one may infer from the current campaign,
the recent economic crisis has little to do with it. In fact, while
food insecurity in America has increased slightly under recent
economic conditions, it has been more or less stable for the last 15
years, affecting around 11 percent of households.
Another interesting tidbit of information is
that until 2005, the FSS divided food insecurity into "food insecurity
without hunger" and "food insecurity with hunger." It then replaced
those labels, without any change in their statistical definition, with
"low food security" and "very low food security," respectively. Thus,
the famous "one-in-eight" hungry Americans include all Americans
living in households that, until 2005, were described as food
insecure, but without hunger.
So, just how many Americans do face hunger?
Well, households with "very low food security" have represented a
consistent third of all food-insecure households in past years —
around 4 percent of total households. Yet, this still does not mean
that one in twenty-five Americans struggles with hunger.
Indeed, what do these statistical categories
mean? This question is essential, because it is only deceptive
definitions that allow activists and the mass media to foster the myth
that "one in eight Americans is struggling with hunger."
In the survey, households were counted as
having low food security if they reported, for instance, that in the
past year they had been "worried whether [their] food would run out
before [they] got money to buy more."
This is a good description of an obviously
very unsatisfying condition: a feeling of insecurity
concerning food. But it does not imply and must not be confused with
actual insecurity concerning food, i.e., actual threats to
one's ability to afford food.
Other criteria were the incapacity to afford
"balanced meals," or the need to rely on a "few kinds of low-cost
food." Moreover, such conditions need not be a household's constant
situation, but only the case "sometimes" during the past year.
Once again, a feeling of insecurity, or the
dependence on cheap food is certainly very undesirable. Still, it
seems an outright lie to describe as "struggling with hunger" those
households (accounting for two-thirds of all food-insecure households)
which reported "few, if any, indications of reduced food intake" at
anytime during the year.
What about households with very low food
security? The distinction between low and very low food security can
best be described as a distinction between subjective and objective
food insecurity.
The "defining characteristic" of households
with very low food security "is that, at times during the year, the
food intake of household members is reduced and their normal eating
patterns are disrupted because the household lacks money and other
resources for food."
Now, even this hardly fits in the definition
of hunger as formulated by the Committee on National Statistics: "a
potential consequence of food insecurity that, because of prolonged,
involuntary lack of food, results in discomfort, illness, weakness, or
pain that goes beyond the usual uneasy sensation."
In fact, households with "very low food
security" include all those that, because of reduced food intake,
sometimes felt the "usual uneasy sensation" of hunger — not hunger in
the sense of a day-to-day struggle to maintain one's health and
strength.
Likewise, publicizing the disastrous
situation of America in the face of hunger, activists obviously point
out the case of children. Yet, a close look at the actual data reveals
that less than 1 percent of households with children had very low food
security among children.
One would expect food insecurity to be
closely linked to household resources. However, half of the households
categorized as having very low food security have incomes well above
the poverty line. "On the other hand," the 2005 report states, "many
low-income households (including almost two-thirds of those with
incomes below the official poverty line) were food secure." Indeed,
only 15 percent of households with incomes below the poverty line have
very low food security.
This means that 2 percent of all American
households sometimes feel the "usual uneasy sensation" of hunger due
to a lack of economic resources — and the vast majority of those with
children manage to spare them from hunger.
Certainly, this constitutes a problem; even
more certainly, the truth is far from the collective-emergency myth
that "one in eight Americans is struggling with hunger."
To read the entire article, click
here.
So what’s the point of that lengthy but, in my
mind, necessary quote?
The point is that politicians and special
interest groups use bogus statistics like the “one in eight” to pull at
the heartstrings of the public and more easily extract their wealth for
personal gain. Only armed with the truth do you stand a chance at
fighting back.
And that, dear reader, is that for today. See
you tomorrow!
Chris Wood
Casey Research, LLC
