Saturday, May 3, 2014

Barron's: Why Oil is Cruising for a Bruising

By SIMON CONSTABLE
Here's a puzzle: The U.S. is producing the most crude oil in decades, domestic stockpiles are at record highs, yet oil prices are near $100 barrel. What's keeping prices aloft?
The first piece of the puzzle is the way the U.S. prices its oil. The U.S. benchmark, known as West Texas Intermediate, or WTI, is based on delivery at a storage hub in Cushing, Okla. How much oil is stored in Cushing affects the price. At the moment, inventories of oil across the U.S. are at their highest going back to 1982, but Cushing has seen a steady drop since a new pipeline linking the hub to refineries along the Gulf Coast opened earlier this year.
The Cushing hub is "running on fumes," according to Société Générale, giving the appearance of tight supplies, and leading prices higher.
Another boost is from money managers, including hedge funds diving into the futures market. Financial firms betting on higher prices outnumbered those betting on a slide by 322,788 futures contracts as of April 22, almost double the number a year ago, according to the U.S. Commodity Futures Trading Commission.
There's more. The U.S. oil benchmark is also tracking global crude prices, which have been elevated by tensions between Russia and Ukraine. The threat of more-intense hostilities and the possibility of a supply outage will likely keep Brent crude, the global benchmark, higher until the situation is resolved, wrote Commerzbank in a recent report. Russia is the second-largest oil exporter after Saudi Arabia, and investors are concerned that Western sanctions in response to Moscow's encroachment on Ukraine could hinder the flow of crude.
Currently, WTI trades about $9 below Brent. U.S. oil prices settled Friday at $99.76 a barrel, up 1.4% for the year.
BUT THAT'S ONLY THE story so far. Analysts see plenty of reasons for oil prices to slide in the weeks ahead. Oil inventories are piling up in the South as several Gulf Coast refineries have temporarily shut down for maintenance, writes Michael Cohen, an analyst at Barclays in New York. Oil continues to flow to the Gulf Coast because it fetches a higher price there—that's the so-called Light Louisiana Sweet, or LLS—than it does in Cushing. But Cohen says transportation costs from Cushing to the Gulf Coast also add $3 to $4 a barrel.
However, the buildup of supplies on the Gulf Coast has started to weigh on the LLS price, and that will bring it closer to the U.S. benchmark price, Cohen says. As prices near parity, it makes less economic sense to send crude from Cushing to the Gulf Coast, which will help supplies at Cushing rebuild. When Cushing's stockpiles grow, WTI prices are likely to soften.
A threat to prices is also "posed by a potential wave of hedge-fund liquidation of existing long positions," Cohen wrote in March, referring to bets on higher prices. If hedge funds do dump a substantial part of those bets, $10 to $15 would be wiped off the price of a barrel, he wrote.
Finally, when the Ukraine crisis abates, Brent prices are likely to retreat, and with that, WTI prices may fall as well.
"It could be a while," but eventually prices should capitulate, says Michael Wittner, a global head of oil research at Société Générale in a recent research report. 
See original story here.

Monday, April 28, 2014

WSJ: Five Important Shrines to Capitalism

By SIMON CONSTABLE
In the spirit of WSJ Sunday's focus on the financial, here are five tourist sites important in the history of capitalism.
The City: At the heart of London's financial district is the Bank of England, the empire's famed central bank, founded in 1694. Guided tours are available some weekends in summer and fall. Check out the current home of Lloyd's of London, located on Lime Street. Mixing God with mammon, don't miss Sir Christopher Wren's nearby masterpiece, St. Paul's Cathedral. See original story here.
The Bank of England 
Photo by Colin Smith, 
CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, 
via Wikimedia Commons

Monday, April 7, 2014

WSJ: How the 'Recency Effect' Trips Up Investors

By SIMON CONSTABLE
When you buy a mutual fund based on its recent performance, you could be succumbing to the "recency effect."
It's a "cognitive defect" from which most people suffer, says Josh Brown, chief executive of New York-based Ritholtz Wealth Management. "People extrapolate what just happened into more of the same." Or put another way, if stocks have consistently risen year after year, people expect they will continue to do so indefinitely.That's the tendency when making a decision to give recent events more weight than things further in the past. See original story here.

Saturday, April 5, 2014

Barron's: Capital Spending Boom

By SIMON CONSTABLE
The prolonged capital-spending drought may soon end. If it does, which seems increasingly likely, equipment makers should benefit.
Over the last five years, Corporate America has spent barely enough to replace worn-out or depreciated machines, equipment, and factory buildings, according to a recent report from Société Générale. In simple terms, capital equipment, which typically costs at least $5,000 and lasts more than a year, is defined as the machines used to make other items.
"Today's capital stock [is] older than at any point since 1964," writes Aneta Markowska, a New York-based economist at SG.
Why? It's the result of chronic underinvestment. Capital stock grew at an average rate of just 1% per year during the past five years, well below the historical average of 2.6%, the report says.
Markowska concedes that capital expenditure orders are "not very encouraging" so far. Orders dropped from December through February, according to the latest government data.
Still, there are reasons why she remains hopeful.
The first is that corporate chieftains know that to remain competitive they need to invest. Second, executives have more of a sense about what the government will do. Stated differently, there is less policy uncertainty.
The Economic Policy Uncertainty Index, as designed by academics from Stanford University and the University of Chicago (Scott Baker, Nicholas Bloom and Steven J. Davis), has remained close to its long run average for the past five months. It spiked considerably during the financial crisis and then again during various fiscal showdowns in Congress.
"History suggests that capital expenditures levels tend to respond to changes in the uncertainly level with a 12-month lag," writes Jack Ablin, chief investment officer at BMO Private Bank in Chicago. The general idea being that when there is more certainty about what the government will do then businesses are more likely to make risky investments.
"I'm hopeful that based on the indicators that [capital expenditure] should rise toward the second half of the year," Ablin says.
If we see capital spending surge due to uncertainty staying low that would help equipment manufacturers like GE (ticker: GE) and Honeywell (HON). Alternatively, investors looking to place a broader bet might want to buy the Industrial Select Sector SPDR Fund (XLI), which holds a basket of industrial stocks.
See original story here.

Wednesday, March 26, 2014

Barron's: Why Copper is Pointing to a Slow Economy

By SIMON CONSTABLE
Dr. Copper is signaling that more danger is ahead.
Copper, which is consumed for a wide variety of uses including manufacturing and construction, is said to have a Ph.D. in economics because of its ability to forecast economic activity. Hence the Dr. Copper moniker.
When prices of the red metal drop it often presages slower economic activity and lower stock prices. Benchmark contracts for copper have tumbled from around $3.38 a pound at the beginning of the year to about $3.00 recently. But that's only part of the story. See original post here.

Monday, March 24, 2014

Barron's: Ukraine Farmers Stockpile Grain

By SIMON CONSTABLE

Here's something to chew on: Ukraine's farmers are using wheat and corn to hedge against the risk of a currency crisis. What's more, the uncertainty in Crimea has the potential to drive prices even higher in markets already worried about supplies from the major grain exporter. See original story here.

Photo by Igor Karimov on Unsplash

Wednesday, February 26, 2014

MarketWatch: The Cost of Dumbness

By SIMON CONSTABLE 

We all know there’s a price for being dumb. The problem is quantifying it.

But now some researchers have an estimate of the cost of America’s failure to make the grade in the classroom. It will cost the U.S. economy close to $15 trillion through the year 2050.

That’s trillion, with a T. It’s enough money to wipe out nearly all of America’s debt. Read more here.
Photo by Museums Victoria on Unsplash