QUESTION IS TO HEDGE OR?

t.man hatter
This is in our view another sign of complacency in the energy market. Airlines might not be buying hedges on the dips, but that doesn't mean you as an investor shouldn't be adding select companies to your energy portfolio.

Take what the market gives you. The more pessimistic people become about the lack of economic recovery the more likely they will get surprised. The more these central bankers claim they know what they're doing, the more they're likely to screw things up.

China is now doling out large cash incentives for interracial marriages to help quell unrest among a mainly Muslim ethnic group. And with the Chinese economy moving down toward 7 percent, new stories about India with its new regime picking up the global growth slack are starting to pop up.

The point is basic: There's plenty of room here for error.

An old investing adage is to buy on the dips, a philosophy generally followed by US airlines in the hedging market over the years. This year? Not so much.
Jet fuel prices have declined in price and volatility so far in 2014. So has jet fuel hedging, at least in the US. What is essentially insurance on any airline’s single-largest cost has become seen as less than necessary.
 
The world’s largest airline, newly merged American Airlines, said it had sold off its hedging contracts by the end of the second quarter, an expected move as merger partner US Airways had gone without hedging since 2008.  

Traders and brokers who make money selling the calls, collars and other financial instruments questioned whether other airlines would pick up the slack, especially tempted by a flat-price drop over the summer.
“My sense is less hedging overall,” one jet trader said. “Take AA. They’ve adopted the US Airways model so they are entirely out of it. Nobody wants to catch a falling knife, plus consolidation has created less demand for hedging.”

Platts data showed that 2014 spot market prices in the benchmark Gulf Coast, where half of US jet fuel is produced, averaged $2.88 per gallon as of August 28. 

http://blogs.platts.com/2014/09/01/us-airlines-hedging/ 

WEEK UPCOMING

 
 Though the week ahead will be abbreviated owing to the holiday, there's still some important items on the agenda, much of it having to do with Germany and it's slowdown. The outlook for a full blown QE program seems to be on investors minds in some cases as a fait accompli. Draghi pushed closer to now or never decision when ECB meets.

There's also some Fed speak scheduled along with Non-farm payrolls and Unemployment rate.

Monday, September 1

US Economics (Time Zone: EDT)

US markets closed for Labor Day holiday
11:00 Fed selling $1.75b-$2.25b Treasuries in 25 to 30-year range

Global Economics (Time Zone: GMT)

JPY Capital Spending, Company Profits
01:00 CNY Manufacturing PMI (Aug)
06:00 EUR German GDP (2Q final)
08:00 EUR Eurozone Manufacturing PMI (Aug final)
08:30 GBP Net Consumer Credit
08:30 GBP UK Manufacturing PMI

Earnings

No reports

Tuesday, September 2

US Economics (Time Zone: EDT)

10:00 ISM Manufacturing (Aug) - expected 57.0, prior 57.1
10:00 ISM Prices Paid - exp 59.0, prior 59.5
10:00 Construction Spending MoM (Jul) - exp 0.8%, prior -1.8%
11:00 Fed purchasing $1.5b-$2b notes in 10 to 20-year range
11:30 Treasury to sell $28b 3-month bills, $24b 6-month bills, $15b 11-day CMB

Global Economics (Time Zone: GMT)

01:30 AUD Building Approvals
04:30 AUD RBA Rate Decision
05:45 CHF GSP (2Q)
08:30 GBP UK Construction PMI
09:00 EUR Eurozone Producer Prices

Earnings

Before:
Conn's (CONN)

Wednesday, September 3

US Economics (Time Zone: EDT)

07:00 MBA Mortgage Purchase Index
09:45 ISM New York
10:00 Factory Orders (Jul) - expected 10.8%, prior 1.1%
5:00 Total Vehicle Sales (Aug) - expected16.60M, prior 16.40M
5:00 Domestic Vehicle Sales - exp 13.20M, prior 12.95M
11:00 Fed to buy $1.75b-$2.25b Treasuries in 25 to 30-year range
11:30 Treasury to sell 4-week bills

Global Economics (Time Zone: GMT)

RBA's Stevens speaks in Adelaide
01:00 CNY Non-manufacturing PMI (Aug)
01:30 AUD GDP (2Q)
01:35 JPY Japan Services PMI
01:45 CNY HSBC China Services PMI (Aug)
08:30 GBP UK Services PMI
09:00 EUR Eurozone Retail Sales MoM (Jul)
09:00 EUR Eurozone GDP (2Q prelim)
14:00 CAD Bank of Canada Rate Decision

Earnings

Before:
Toll Brothers (TOL)

After:
H&R Block (HRB)
PVH Corp (PVH)

Thursday, September 4

US Economics (Time Zone: EDT)

07:30 Challenger Job Cuts - prior 24.4%
08:15 ADP Private Payrolls (Aug) - expected 220K, prior 218K
08:30 Initial Jobless Claims - expected 300K, prior 298K
08:30 Continuing Claims - prior 2527K
10:00 ISM Services (Aug) - exp 57.5, prior 58.7
11:00 Fed to purchase $4.25b-$5.25b Treasuries in 8 to 10-year range

Fedspeak

12:30pm Mester (presumed hawk, voter) speaks in Pittsburgh
8:15pm Fisher (hawk, voter) speaks in Dallas
9:00pm Kocherlakota (dove, voter) speaks in Montana

Global Economics (Time Zone: GMT)

01:30 AUD Trade Balance and Retail Sales
06:00 EUR German Factory Orders
07:30 EUR German Construction PMI
11:00 GBP Bank of England Rate Decision
11:45 EUR ECB Rate Decision

Earnings

Before:
Joy Global (JOY)
Ciena (CIEN)
Mattress Firm (MFRM)

After:
Quiksilver (ZQK)
Finisar (FNSR)
El Pollo Loco (LOCO)

Friday, September 5

US Economics (Time Zone: EDT)

08:30 Nonfarm Payrolls (Aug) - expected 225K, prior 209K
08:30 Private Payrolls - exp 205K, prior 198K
08:30 Manufacturing Payrolls - exp 20K, prior 28K
08:30 Unemployment Rate - exp 6.1%, prior 6.2%
08:30 Average Hourly earnings YoY - exp 2.1%, prior 2.0%
08:30 Average Weekly Hours - exp 34.5, prior 34.5

Fedspeak

3:45pm Rosengren (moderate, nonvoter) speaks in Boston

Global Economics (Time Zone: GMT)

05:00 JPY Leading Index (Jul prelim)
06:00 EUR German Industrial Production

Earnings

No major reports scheduled


Twitter: @MichaelSedacca

HELLO TECHNOLOGY

 t. man hatter
One of the concerns of environmentalists when it comes to pipelines is safety. Actually, that's one of their concerns when it comes to just about anything, but we digress.

Yet pipelines like just about every other thing around undergo technological changes as in benefit from new technology.

Pipeline spills, owing to corrosion, rupture and the like are common. And that can spell messy more ways than one. Spills and leaks, irrespective of their origins, cause costly damages to the environment and the pipeline companies.

Last year, according to oilprice.com, "over 119,000 barrels of oil were spilled." Many of America's pipelines are joining the baby boom generation. They're getting older. And like their baby boomer brethren they start to creak, corrode and rust.

That leads to new generations of pipelines to push aside the older ones. If you've lived a while in this dimension you'll understand what we're saying. And that's where technology comes aboard.

One of the major ways pipeline operators detect corrosion is with a “pig,” a machine that travels down the inside of a pipeline looking for problems.

Pigs are not new — the industry has long relied heavily on them—and the newest generation of pigs, known as “smart pigs,” is considered an improvement over the pigs of yesterday. Smart pigs give a read on the state of the pipeline, such as cracks, corrosion, and metal loss. Operators receive this information in a control room and can then dispatch crews to fix the problem. As of 2012, 93 percent of pipeline inspections were conducted using smart pigs.

But smart pigs might not be enough. Enbridge (NYSE: ENB), a major Canadian pipeline company, has spent over $4.4 billion to upgrade pipeline safety. It is spending big bucks after one of its pipelines spilled oil into the Kalamazoo River in 2010 – a corrosion breach that Enbridge’s smart pigs failed to detect ahead of time.

And that’s the problem: despite recent advances, smart pigs aren’t terribly accurate. They also require pipeline operations to shut down (you can’t pump oil through a pipeline if there is a machine in the way), and analyzing the data smart pigs gather can take some time. The Wall Street Journal ran an article last year that talked about the pitfalls of smart pigs, even as pipeline companies continue to depend heavily on them.

So alternative methods to detect trouble spots are needed. One method for detecting corrosion uses a device from outside the pipeline. A series of sensors placed on the outside of the pipeline can search for corrosion without interfering in operations.

Pipeline safety company Fox-Tek, a subsidiary of Augusta Industries (CVE: AAO), uses such a system to detect corrosion, as well as a fiber optic system to detect bends, strains and stress in pipelines.

But the real innovation in Fox-Tek’s system is its data analytics package. Companies that use smart pigs usually need to spend months doing post-inspection analysis, but Fox-Tek has developed proprietary software that does continuous and automatic analysis.

To read more about this fascinating development click on the link.

http://www.mining.com/web/new-technology-could-end-the-debate-over-pipeline-safety/

TRAVELING THE WEB

As we travel around the web we look for interesting stuff we think our readers would enjoy. A lot of it catches our interest, but obviously we can't present it all. And then there's that arbitrary thing called taste or interest or, as some might more correctly call it, bias.

We like to try to read both sides of an issue. We should probably say 20 sides given how divided people are today. To be sure, the Web's an interesting place. There's lots of not so good stuff and plenty of smart people who, to the chagrin of MSM, now have a platform to express their views.

The MSM monopoly is over. As a tool of freedom the Web is probably unparalleled. Read it and decide for yourself. Just look at China, Russia and, yes, your United States of America with its ever-encroaching surveillance of its citizens to understand how big a threat Al Gore's discovery is. 

Myths get created more for a reason than by chance. 

With that idea in mind we post this story about Japan and the US, contrary to what MSM has promulgated for years, running parallel economic courses for longer than any lost decade. Just to be clear, we include much of what spews forth from Wall Street's propaganda machine in our definition of MSM.
t. man hatter

http://profitsofchaos.com/2014/07/18/the-myth-of-japans-lost-decade/#more-640

                       

       

CALIFORNIA DROUGHT

t. man hatter
                                                                               Sometimes things show up in the least expected places.

And at a Central California salmon hatchery isn't one of them. But the subject is drought, one of the worst on California record. Yet that's where it sprouted last time a bad drought hit the Golden Bear state.

According to the Wall Street Journal, California farmers "are squaring off against Indian tribes, environmentalists, and fishermen over the Federal release of water to aid salmon."

This dispute is just one small crack in a huge crack in a large wall that separates environmental extremists and others. It's a small metaphor for large forces around the globe at work that eventually have the ability to tear society apart it its very seams. And it's growing.   

Such things become all but routine when the pendulum of common sense swings too far. Food, humans, jobs or salmon? Many would agree that the intolerance of fundamental Islamism and fundamental Christianity are part of the same intolerant pendulum swung too far.

Middle ground in these issues is rapidly joining the middle class, an endangered species rushing towards  non-existence. These are hardly pretty thoughts, but that's the nature of reality. Divisions grow almost daily. The last two administrations, one Republican, the other Democrat, have been among the most divisive in the history of the Republic. Anyone who thinks otherwise is a partisan.

The incompetence and arrogance of politicians and bureaucrats globally provide tinder for the flame that burns dimly, latent for the moment.  But it's there and only the naive and irrational choose to ignore it.

A friend recently stopped by a national grocery chain store to pick up some squaw bread for the upcoming holiday. When she couldn't find any, she inquired about it to the the manager who, to her surprise, told her the vendor a few months earlier informed him they stopped making it.

Reason? The name squaw, which has been around for years describing the delicious brown bread, offended people. So rather than change the name, the company decided to just quit making it. Trivial, you claim? Don't think so.

Here's another recent one. Forget the National Football League's Washington Redskins. This one is a bit more personal. Read "An Interesting Thing Happened To Me Today" at http://www.dailyspeculations.com/wordpress/?p=9617

Like in the stock market, there's the old saying about the straw that breaks the camel's back, a misnomer in our view because nobody knows for sure which straw actually did the damage since they all contribute to the problem.  

Only in retrospect--and even then it's still a lot of guessing-- does what issue tanked the market become somewhat clear.

ANOTHER VIEWPOINT

It's hardly a secret that German officials are resisting QE and some would argue with good cause.

As the graphic above from Marc Chandler's http://www.marctomarket.com shows, the CRB Index and the euro have been like Siamese twins for a  while now. (Yellow line euro, white CRB Index).

Chandler, a well known foreign exchange market analyst, writer and professor, makes some interesting points. This not about, as he notes, a causal relationship.

What we are interested in here is the news today that while the preliminary August euro area headline inflation ticked lower, the core rate actually rose.  In our discussions of the lowflation in the euro area, we have emphasized a three considerations.

First, we argued that the disinflation/deflation in the periphery was the actually a sign that the system (monetary union) monetary union was working.  This can be understood as tantamount to an internal devaluation.  This is the alternative to the external devaluation that so many economists called for when they argued Greece, or Cyprus, or Portugal or Italy, or Spain should exit the EMU, devalue, and perhaps, re-join.  

Second, we argued that to the restoration of competitiveness simply requires a EMU member to have lower inflation than Germany.  Therein lies the rub.  By Germany have such low inflation itself (preliminary August estimate of 0.8%), it forces others to risk deflation.   German officials cringe at the idea that it needs to run higher inflation.  Moreover, Germany industrial and government workers have seen higher wage settlements and a minimum wage has been introduced.  Much to the chagrin of Merkel's critics on her right, the Chancellor has support other social programs, that her coalition partners, the Social Democrats endorse.  

Third, to the extent that the lowflation is a function of weak economic growth and high unemployment (though not in Germany), it may not be amenable to monetary policy.  German officials have been clear in word, and the EU has been clear in deed, that the Stability and Growth Pact allows for greater fiscal flexibility that has been explored up until now.  This does not only refer to giving countries more time to meet the 3% deficit target, but also speaks to the flexibility that the creditor countries, like Germany, are not using.  This seemed to be as much, if not more, of Draghi's message at Jackson Hole.  It is also likely to be the subject of heated debates at the weekend EU Summit.  

The CRB Index put in the low in the middle of last week and has trended higher since.  The 5-day moving average is likely to cross above the 20-day average for the first time in nearly two months. The combination of the weaker euro (-3.6% on a trade-weighted basis over the past six months) and a bounce in the CRB Index could point to a bottom in euro area inflation in the Sept/Oct period. 

Don't think that German officials, both at the central bank and in Berlin, are oblivious to this prospect.  It will give them yet another reason to resist QE.  Some observers have dubbed an ABS purchase scheme as "private QE".  While this might distinguish it from the US and UK, note that the BOJ  buys corporate bonds, commercial paper, REITS and ETFs.  Moreover, the Fed and BOE made their asset purchases in the secondary market, which also gave funds to private (institutional) investors.  

 

If the bottom in eurozone inflation registers in September/October, as mentioned, QE from the German viewpoint would be entirely unnecessary. So you might want to watch the CRB Index a little more closely.

t. man hatter

 

 

BRATWURST ANYONE?

He may be German, but he just might turn out to be right.

German Finance Minister Wolfgang Schaeuble in a Bloomberg interview at the Medef business leaders' conference near Paris was quoted as saying he agrees "100 percent"  with ECB President Mario Draghi about balancing monetary policy with structural reforms.

 ‘Monetary policy can only buy time,’’ Schaeuble said in the interview yesterday. “Liquidity in markets is not too low, it’s even too high. Therefore I think monetary policy has come to the end of its instruments and therefore what we urgently need is investments, regaining confidence by investors, by markets, by consumers.” 

A lot of people won't like this because it's about staying the course against structural reform at a time when many are asking for some slack when it comes to meeting EU deadlines on debt levels.
  
“I don’t think ECB monetary policy has the instruments to fight deflation, to be quite frank,” Schaeuble said. Domestic demand is driving German growth “because we have high confidence of consumers, investors.” 

“And the main reason why we have such a high confidence is they think our public budgets are sustainable, we will stick to what we have promised and we stick with investment,” he said. 

The absence of inflation in the EU zone continues to plaque central bankers. Inflation slowed this month in the EU, according to recent data, with consumer prices rising 0.3 percent from a year earlier, its lowest rise since late 2009. The euro trading at an 11 month low remains little changed at just  over $1.318.

Schaeuble took note of French President Francois Hollande's  mover to change his cabinet to more pro-business members, saying "It's a good decision."

Perhaps the most telling quote came when Schaeuble was asked about the course France would take. "...my French colleagues will do what's needed to enhance our competitiveness in line with the rules that have been agreed again and again."

He concluded his comments with: “It’s very important that we all know in Europe -- every member state -- that we have to stick to structural reforms and enhance competitiveness, even in Germany,” he said. “We are fine actually, but if we were not to continue to enhance our competitiveness in coming years we would lose our position.”

Slice, dice the bratwurst anyway you want, but doesn't appear to be much culinary digesting room there.
t. man hatter