OPEC’s poker game

The news this week that some OPEC members have at least agreed to talk, and possibly freeze production, had traders covering their oil shorts, sending crude up over 15%. But why should simply freezing production at multi-year levels stem oil’s price decline? Nay Sayers are right when they argue that holding production where it is does not solve the oversupply problem in world energy. At the present rate of production, an additional 330 million barrels of oil (or about 1 million bbl. / day) of unneeded oil is flowing onto world markets. That oversupply has been building for a year or more. It is being stored in spare oil tankers, storage tanks and wherever else suppliers can find to stockpile the stuff. And storage capacity is close to being filled, despite the winter weather in the U.S. At most, freezing production solidifies an extremely negative supply imbalance. As usual, not all is what it seems when reading the headlines, especially when it comes to the politics of OPEC and the Middle East. Remember that up until now, OPEC’s largest producer, Saudi Arabia, as well as Russia (the largest non-OPEC producer) have not even discussed global energy oversupply. The fact that they are now willing to talk and possibly freeze production could be an important first step in a possible solution to the firestorm of falling prices that has done damage to both countries and their finances. Bears point to the fact that oil producers like Iran have no intention of freezing production. The global embargo on that country’s energy exports, imposed over Iran’s nuclear program, has only now been...

A tale of two Chinas

For years, investors bought into the China story. Growth rates twice as fast as the rest of the world, fueled by sky-rocketing exports made competitive by billions of hard-working, low-wage employees grateful to have a job. What happened? Times have changed. Back in the late 1970s when China first opened its fledgling economy to foreign investment, manufacturing became the chief driver of economic growth, which led to increased exports, more foreign investment and double digit growth rates. The powerful Communist government controlled the process through its sponsorship of state-owned enterprises. These mammoth companies became the symbols of a new “Chinese Authoritarian Capitalism.” As such, they played a pivotal role in channeling that foreign money and the goods it produced through the economy. Along the way, these companies were listed both on the Chinese stock market as well as abroad. They became the investments of choice and were included in all the most liquid and popular mutual funds and exchange traded funds. As time wore on, these companies borrowed more, hired more and purchased more and more. Corruption, mismanagement and scandal began to pop up among the managements of these companies. At the same time, as the worldwide financial crisis unfolded, the Chinese economy started to falter. Unfortunately, at about the same time, China’s leaders decided that it was time to transition the economy from its reliance on manufacturing and exports to a new growth model more dependent on consumer services and other forms of consumption. The move made economic sense. China, through opening its economy, had engineered the birth of an enormous and growing middle class. These new consumers,...

How “black” will this Black Friday be?

For retailers, the upcoming Thanksgiving holiday traditionally signals the beginning of the do-or-die holiday selling season. The question worrying Wall Street and retailers alike this year is will the results justify the hype? Listening to the third quarter earnings and revenue guidance from retailers last week, there was little to applaud. Department stores were especially downbeat on their expectations for the entire 2015 holiday shopping season. Big discount stores, like Walmart, were less negative, and argued consumers were simply keeping their powder dry, while waiting for next weekend’s super deals. Some analysts argue that the disappointing earnings most retailers posted had more to do with the exceptionally warm fall weather we have been experiencing than lack of shopper enthusiasm. October, after all, will go down in the history books as the warmest October on record. That had to hurt winter clothing and apparel sales. You may have noticed that the usual sales hype we come to expect wherever we look about now has been somewhat muted over the last week. That may have more to do with the terrorist bombings in Paris than anything else. Promoting the latest gizmo for your dog, or a better hair curler to de-frizz your hair may not be as meaningful to you when Parisian cops are storming apartment buildings and Russian planes are blowing up over Syria. Most pundits are expecting a 3.7% rise in retail sales, which is below last year’s 4.1% gain. Is it the economy, the weather, geopolitical events or changing tastes really behind the slowdown, or is Black Friday losing its mojo? Officially, Black Friday was an invention of...

The Marijuana Market

Only four states have legalized marijuana for recreational use so far. Another 23 have given the nod for using cannabis for medical usage. Today it is a $2billion industry that is set to grow substantially in the years ahead if more states jump on the band wagon. Whether legalization is a fad or a trend in this country will have to wait until the next election cycle in 2016. Legalizing the drug will most likely be on the ballot in several more states. Researchers from California-based The ArcView Group, a cannabis investment and research firm, predicts that 14 more states will legalize marijuana while two more will legalize medical marijuana next year. In addition, at least 10 more states are “considering” legalization, according to them. Since the latest polls by Gallup indicate that only a slim majority (51%) of Americans favor legalizing marijuana, those projections may prove to be overly-optimistic. If they did materialize, that would place legal marijuana as the fastest growing industry in the United States. To date, only four states—Colorado, Washington, Alaska and Oregon—have developed a retail trade in legalized marijuana. D.C. has also legalized the drug, but sales are currently banned. Congressional Republicans have blocked the new law. Remember too that the Federal government still considers marijuana a dangerous drug (a Schedule 1 controlled substance like heroin or LSD). And clearly, there are a number of legislators that are bound and determined to keep it that way. As a result, if you are thinking of entering this business you should be aware of the drawbacks and political risks before ripping up the tomatoes and re-planting...

Could Greece upset the applecart?

    This week a parliamentary vote to elect a president failed in Greece. National elections have now been called for late January. The outcome could trigger a revolt against an austerity program that has brought years of suffering and pain to the population. Today, the unemployment rate is about 25% in Greece. Its’ citizens have been living with higher taxes, less goods and services, declining government spending, fewer pension benefits and longer work hours for many years. This unhappy saga was the result of a decades-long binge of government spending, huge deficits and even higher debt. Detractors and creditors alike say the Greeks have only themselves to blame. The global financial crisis triggered the end of the party. Since then, the Greek economy has suffered through three distinct recessions. As the economy slid, the viability of the country’s sovereign debt, which was held by the largest banks and financial companies throughout Europe, came into question. European leaders were terrified that the country would declare bankruptcy, renege on that debt and drag down the entire EU financial system with it. A two-part debt bailout program was put together throughout 2010-2012. Various Eurozone countries, the European Central Bank and the International Monetary Fund (called the Troika) cobbled together a multi-billion dollar package that saved Greece (and the Euro) from economic disaster. In exchange, a severe austerity program, at the Troika’s insistence, was forced on Greece and its citizens. Since then the prescribed medicine has improved the outlook for the economy and unemployment. In the meantime, Greek government debt has been quietly shifted from the hands of the banks, (which took...

A Taste of things to come

  If you are a bond holder, the last few weeks may have come as a shock. Ever since the Fed raised the possibility of tapering their stimulus program, interest rates have spiked higher. For the first time in years, bondholders actually saw bond prices decline. Get used to it. If you are a Baby Boomer, the price declines in all things that yield interest or income since May 22 might have you wondering what happened to your “safe” investments. All our professional lives we were told that bonds were “safe,” for “conservative” investors, widows and orphans and for those among us that find the stock market too risky. That was sage advice, if somewhat misleading. For the last thirty-one years, interest rates have been declining. As a result, bond prices have moved steadily higher. It wasn’t that bonds, as an asset class, were without risk. It was simply that bonds were in a classic bull market. From 1982 to 2012, for example, the average annualized return of U.S. intermediate-term bonds have been 8.82%. In contrast, the S&P 500 Index had an annualized return of 11.14%. So while we were telling ourselves that we were being conservative, in actuality we were riding a wave of speculation betting that interest rates would decline further and further and forever. Well, reader, the buck has stopped here. Interest rates can’t go any lower. Nor is the natural order of things for interest rates to remain at historical lows forever. Something had to change and in this case it is the Fed. The U.S. ten-year Treasury note is the interest rate most investors...