MORE ON GOLD

Here's the real story behind the Swiss national bank's sudden ending of its 2011 peg to the euro.

Economist John Maynard Keynes was noted for saying lots of things and one of them was a response to a question about changing his view to which he reportedly replied: "What do you do when you find out your wrong? I change my mind."

And that's what the Swiss central bank did last week, change it's outlook before their central bank doors get blown off their hinges in a modern day central bank version of your pain tolerance is important but not as important as ours.

Last one out turn off the lights because you won't be needing them any time soon.

http://www.mining.com/swiss-franc-farce-may-be-gold-price-tipping-point-89548/

VOLATILITY CHECK

American humorist Will Rogers presciently pointed out a long time ago that he was more concerned about the return of his money rather than the return on it.

In case anyone doesn't understand, Rogers' observation is a metaphor for what's going on big time in today's markets as investors scramble for yield while turning a blind eye about the risk to their capital.

As this Thursday approaches and the nearly consensus market expectation the ECB will roll out some form of QE, interest rates are likely to head lower once the economic cards hit the table in full view. 

In a world of falling interest rates or one central bank instigated and supported with a put option, investors will be scrambling for yield more than ever.

Such a scenario would bode well for safer dividend yielding stocks and certain asset mangers who can out perform returns investors get from traditional accounts like savings and CDs.

If you feel the limb getting slimmer and slimmer as investors scoot farther and farther away from the trunk, you're probably onto something.

One might say the interest rate and yield climate is the opposite of what's going on in the oil market where any positive news is being totally ignored and only the negative given any traction as many Wall Street firms that completely missed the oil downturn are only now tripping over each other to get out their most bearish reports.

In our view too many investors are expecting QE European style to mimic what QE American style did at least in part and that is keep volatility in check.

That's a meter for the last couple of years that's been relatively flat.

WATCH WHAT YOUR HOLDING

Gold hit a four month high Monday pending the ECB's expected but long-awaited QE program.

Talk about looking for a four leaf clover in a field where uncertainty and indecision reign, the wished-for-magical elixir of QE's been on the minds of too many for too long.

The euro recently hit an 11-year low against the rising U.S. dollar. Printing money debases the currency being printed. If one writes favorably about gold he or she is by MSM standards a gold bug. But those who vilify the yellow stuff are mostly fiat paper shills.

So the gauntlet has been tossed. Priced in euros gold is now back to prices not seen since 2013, having risen 3.5% since the Swiss central bank performed its monetary tap dance on currency markets last week.

Low bond yields are part of what goes around comes around. Low bond yields lower the holding costs associated with gold helping wipe out one its critics favorite points--gold doesn't yield anything while one is holding it. 

To the less MSM-annointed members strolling around the planet that seems a curious thought given the current yields on checking and savings accounts, notwithstanding taxes and government lies about the absence of inflation.  


In 2011 gold topped out at a record $1,921.17 an ounce before falling just under 30% in 2013 to the cheers of the fiat money crowd. Last year it eked out a small rise.

The bigger message from the Swiss bank heist is one fiat money shills could come to hate--central banks are not what many believed, fortresses of stability. 

While for those who choose the easy road, targeting greedy individuals and corporations for widening the income inequality gap, central banks with their easy money madness might be the real villains hiding in the economic clover.

Make no mistake. If Euro-style QE, even in its most-watered down form, happens, there will be money to be made. But it won't be made by those at the  bottom of the economic pit. That's not the way central banking works. It's only the way they talk.

So be careful what you're holding.

DOWNSIDE PRESSURE

 
 U.S.markets were closed for the Martin Luther King holiday but that didn't stop oil futures from declining.

NEW YORK (MarketWatch) -- ICE Brent crude oil futures for March delivery lost $1.33, or about 2.7%, to close at $48.84 a barrel on Monday during a session when U.S. markets were closed in observance of Martin Luther King Jr. Day. The London-traded benchmark is now down 57.5% from its 52-week high of $115.06 in June, and has fallen during 13 of the past 17 sessions, according to Dow Jones data. Brent crude is down 14.81% in 2015.

It will be interesting to see if New York follows suit when things get back to full stride Tuesday.  

With all the downside pressure on oil prices one could postulate much of the pressure that goes into the fracking business is being pumped in another direction.

Just where the point of equalization is, nobody knows. But there will be one, that much is clear.

GREED TAKES A HIT

Greed may know no bounds, but Thursday last week greed--the Federal kind--took one across the face.

U.S. District Judge Carl Babier ruled that British Petroleum unloaded 3.2 million barrels of oil in the Gulf not 4.2 million the U.S. government claimed.

That's a 25% decrease and as we previously noted U.S. officials wanted to fine BP $4,300 a barrel. On Friday BP's shares jumped 5.5% to close at $37.86. Even at this price the shares on a $2.40 dividend are  yielding 6.7%.

Instead of the old milk bottle, this is a game of spin the oil price wheel and see where she stops. Nor is it how long the price stays there, despite the palaver about falling knives and lost opportunity costs owing to tied up capital.

Big oil is cutting costs. Most of these programs means job cuts, too. In this case higher paying jobs--not those hamburger flipping types created since 2008. Those job cuts effect to a degree any benefit of lower prices at the gas pump.

If there is a mainstream media meme more over-worked today than that expected $150 billion tax break to consumers if oil stays in the $50 a barrel range, we have not seen or heard it.

 Much of the current attitude around the Street about oil disallows for the unseen.

UNDISPUTED

 

A lot of people are eating fresh crow this morning, including three guys named May, Palmer and Pollock.

No, they're not members of some prestigious legal firm, just three media ex-jocks who know a lot less than they think they do. 

They said Ohio State was untested and undeserving. But all Ohio State did was defeat the number one and number two teams back to back.

Congratulations to The Ohio State University, their coaches, players and fans, college football Undisputed National Champions 2015.

Enjoy your breakfast, gentlemen. Enjoy your breakfast.

AND THEY MIGHT NOT LIKE IT

Be careful what  you wish for goes an old saying.

Sure consumers are suppose to be rejoicing as gasoline prices at the pump drop. But much of that may soon be offset by higher gasoline taxes. It's been a few years since those sophisticated bureaucrats have tacked on more of those little goodies.

What apparently many don't seem to understand is falling energy prices and a dollar on steroids are both double-edged blades. Falling energy and rising dollar prices are quite different from stables ones.

Part of the dollar strength is coming from the beggar-thy-neighbor policy central banks in Japan, the EU and elsewhere are playing which brings up another issue. Is the U.S. economy really that good or is much of its rise owing the how weak other economies around the globe are?

The answer to that is what many investors may yet have to discover. And they might like it once they do.

Here's a story about possible state budget shortfalls owing to the declining energy prices. There will be others and they won't all be in those oil producing ones.

AUSTIN — State Comptroller Glenn Hegar, predicting a moderate economic expansion, said Monday that lawmakers will have $113 billion in state revenue available for general-purpose spending in the next budget cycle.
The total includes $7.5 billion that will be left unspent when the current budget cycle ends on Aug. 31. It also accounts for $5 billion in general-revenue transfers to the rainy day fund and the state highway fund.
Hegar said his estimate expects "moderate expansion" in the Texas economy while reflecting uncertainties in oil prices.
"Texas remains a leader on the national economic stage, and while we anticipate the robust pattern of growth the state has seen in recent years to moderate, we do expect continued expansion of the overall economy," Hegar said in a statement.
Hegar's estimate has been closely watched because of dropping oil prices. It sets the parameters for spending decisions by state leaders and lawmakers.
His revenue estimate projects an 8.9 percent increase in state sales tax revenues and a 14.3 percent drop in oil production and regulation taxes.
In addition to incoming revenue, the state's rainy day fund will have an $8.5 billion balance at the end of the current budget cycle.
State revenue from all sources, including federal money, is estimated at $220.9 billion in the next two-year budget period.

A COILED SPRING WILL UNCOIL ITSELF

As an investor one must be disturbed by central bankers everywhere and their fascination with a 2% inflation target.

It's almost reached point of becoming the assured panacea of Central Banking Gods, the answer to all of the globe's myriad economic ills.

One of the first things any good medical diagnostician learns is, never make your diagnosis in the lab or base it on a lab result.

Just to take one example, mammograms, like it or not, they're a metaphor for labs. Yet data show 50% fail to detect smaller cancers. The list of false positives in lab work, blood, urine or otherwise, is long. If you can have false positives, you must have false negatives.

Yet central bankers--the so-called  diagnosticians for monetary policy and economic growth--continue to worship at the alter of preconceived numbers. This seems to be about as fixed as fixed-views get, a view that could prove quite dangerous. Inflexible might be a more accurate term.

Most of the Fed folks are noted for their economic gobbledygook and their mind-numbing reports written in an even more mind-numbing style. Much of it wouldn't earn a solid C in a college freshman basic English class.  

And this leaves out all those econometric model abortions the profession so reveres. 

So one hardly expects them to be versed in the classics like Sophocles' Antigone:

The inflexible heart breaks first, the toughest iron cracks first, and the wildest horses bend their necks at the pull of the smallest curb. 

Point being: We might all be better off--including the economy--if these folks spent less time soaking in the bathtub with their rubber ducks pouring over figures and a bit more reading estimable stuff like the classics. 

A coiled spring will uncoil itself, absent time and interference.

WHO KNOWS?

More from the oil patch.

Looking for a bottom in crude prices has become almost as popular of late as fantasy football. How popular is that? Well, here's a link about a guy who spent nearly 300 hours in 2014 playing the game.

And he came in second, winning the huge sum of $30.

http://www.theonion.com/articles/man-who-spent-300-hours-playing-fantasy-football-t,37707/

To be sure, nobody knows for sure where the bottom is. Or for that matter when it will occur. We've seen projections for $20 a barrel on the low side and others in between the recent breach below $50 a barrel. 

Here's the opinion of a well known energy trader that's worth considering in the jumble of those out there. Given the speculation it is one of those anyone can be wrong and anyone can be correct.

But if past is prologue, when it's all said and finished, a whole bunch of them will claim the prize that they called it.

Renowned Trader Hall Sees $40 Oil ‘Absolute Price Floor’

By Bradley Olson and Simone Foxman - Jan 7, 2015

Oil prices have almost bottomed out and “some recovery” is likely by the second half of the year as demand picks up, commodity hedge fund manager Andrew J. Hall told investors.

Crude could trade in the $40-a-barrel range in 2015, close to “an absolute price floor,” the head of Astenbeck Capital Management wrote in a Jan. 2 letter obtained by Bloomberg News. A significant amount of U.S. and Canadian production can’t cover the cash costs of operating at that price, he said.

“Oil prices will stay under pressure in 2015,” he wrote. “However, current prices are not sustainable in the longer term. The interplay between extreme weakness in the short term and the potential for supply shortfalls in the medium term should create attractive trading opportunities over the course of the coming 12 months.”

Hall gained notoriety in 2009 after receiving a pay package of about $100 million while at Citigroup Inc., a bank that received government assistance during the financial crisis. For more than two decades he led Phibro LLC, which Occidental Petroleum Corp. (OXY) bought from Citigroup. Founded in 2010, Astenbeck manages a total of $3 billion.

Phibro is in the process of being sold by Occidental and Astenbeck is now operating independently, according to two people familiar who asked not to be identified because the matter is private. Spokeswomen for Occidental and Astenbeck declined to comment.

Plunging Prices

West Texas Intermediate oil, the U.S. benchmark, fell below $50 a barrel this week for the first time in more than five years. WTI rose 1 percent to $49.11 at 1:21 p.m. today in Sydney. Prices fell 46 percent last year, as flagging demand forecasts met expanded output from North American shale formations.

A futures contract for April delivery is selling for $49.78. Delivery in December is $55.12 a barrel, according to data compiled by Bloomberg.

Saudi Arabia and its allies are seeking to drive high-cost producers from the market, Hall said. While many have assumed this is U.S. shale drillers, the majority can operate at lower prices, he wrote. The most vulnerable operate in Canada’s oil sands and deep-water production, said Hall.

Cuts in spending this year will set the stage for an eventual supply shortfall, said Hall, who has long held that oil will become more expensive. Once prices begin a sustained increase, companies won’t be able to count on as much new crude from projects. The low prices also increase the risk of geopolitical instability, another factor that could boost oil if a major producer is unable to make exports, Hall said.

THE OIL BACKDOOR

Here's a theme we've been mentioning for a while now. We like to call it the unseen.

As adroitly put in this article from Platt, "while volatility slips in through the back door."

The recent auto sales reports tells you much about humans. Sales were up and so were profits as buyers, given the fall in gasoline prices, shunned the economical for big trucks and SUVs. The backlog of more climate-friendly wheels are clogging car lots like they're a bunch 80 year old coronary arteries. 

New vehicles usually come attached to three or five year notes. Where will the price of petrol be in three or five years, who knows?  When gas filed tanks at $4 a gallon, how easy was it to unload those huge clunkers. About as easy as it is now for dealers to unload all those lower profit margin gas savers nobody--at least at the moment--basically wants.

One could talk short-sighted here, but no-sighted might be more accurate. Even more appropriate is people are people. To think otherwise is to take your eye off that back door.

http://blogs.platts.com/2015/01/08/oil-future-problems/