Today's oil price

 $ 91.86  per barrel Daily change of  10/12/12 ( 91.16% ) Oil Quote Updated Oct-13-12 1:30 PM

Predictions and causing prices to invest economy: Oil Prices Set to Fall Through 2017

Oil prices are expected to fall over the next five years as demand slumps and a ramp-up in production helps boost supplies, the International Energy Agency (IEA) said Friday.
The group, which represents the world’s 28 richest countries, said the combination will help “redefine the refining industry and transform global oil trade,” though it noted geopolitical risks will continue to loom over the oil supply chain.
The Paris-based IEA sees global oil product capacity growing to 101 million barrels of oil a day by 2017, above its earlier forecast of 95.7 million barrels.
Global demand is forecast to grow at an annual average of 1.1 million barrels a day over the next five years, compared with the IEA's earlier projection of 1.2 million barrels.
More of the growth in oil supply is expected to come from the Americas, buoyed by new drilling technologies in U.S. and Canadian oil sands. Growing output from reserves like the Bakken and Eagle Ford shales has helped propel U.S. domestic oil production to the highest level since 1995.
Looking to capitalize on the jump in production, oil major BP recently secured a license to ship U.S. crude oil to Canada and Royal Dutch Shell is reportedly applying for U.S. export licenses.
Oil production in Middle Eastern countries like Iraq is expected to continue ramping up despite diminishing appetite in North America, and that could help feed growing regional demand there.
“Iraq stands out as its production capacity is expected to enter a new growth phase, which may continue even beyond the forecast period,” the IEA said.
However, in other areas, such as Libya, security concerns may continue to constrain production growth over the next few years.
While some Western companies like BP (BP) have announced plans to return or ramp up production in Libya since the killing of long-time dictator Moammar Qaddafi a year ago,

the killing of a     U.S. envoy there last month resurrected safety fears. 
The IEA, though, said it expects new supply sources to more than offset any decline in rates or outages elsewhere in the world, as well as the tough international sanctions on Iran.
At the same time, the spreading of refining capacity to emerging regions like Asia is expected to help offset decreases in other areas of the world.
Internationally traded crude volumes are projected to decline sharply, but the IEA said product trade is forecast to growth in both volume and scope.
Sweet crude oil was down about 0.50% Friday afternoon to $91.52 and is down about 6.84% from the start of year. It’s still up about 9.3% from 12 months ago.

Today's oil price

$91.36 per barrel

Daily change of 0.11 ( 0.12% )

Oil Quote Updated Oct-10-12 4:00 PM

Beyond The Fiscal Cliff: The Dollar At Risk?

Looking beyond the fiscal cliff, we are afraid the greenback may be at risk no matter who wins the election. We examine the risk to the U.S. dollar in the context of the likely policies pursued under either an Obama or Romney administration.

Some context: The budget deficit as a percentage of Gross Domestic Product (GDP) in the U.S. is worse than that of some of the weak eurozone countries (Portugal, Italy); the eurozone as a whole has a far lower deficit. If the "fiscal cliff" were to take place -- that is, if the tax hikes and government spending cuts were to take effect as currently scheduled -- the U.S. would still face a deficit exceeding 3% of GDP before factoring in any economic slowdown as a result of the cliff. The fiscal cliff the U.S. is facing would impose eurozone style austerity measures and -- just as in the eurozone -- not eliminate the deficit.

Why does it matter? Unlike the eurozone, the U.S. has a significant current account deficit. The current account deficit is exactly the amount foreigners must buy in U.S. dollar denominated assets to keep the dollar from falling. As a result, the U.S. dollar may be vulnerable should foreigners reduce their appetite for U.S. bonds. In contrast, the fallout from the eurozone debt crisis has had a limited effect on the euro because the eurozone as a whole does not need inflows from abroad to keep the currency stable.

U.S. bond market at risk: Foreigners don't need to sell U.S. bonds for there to be a risk to the U.S. dollar: they simply need to include fewer Treasuries in their purchases going forward. Should the decades-old bull market in U.S. bonds turn into a bear market, foreigners might be inclined to deploy fewer of their reserves into U.S. Treasuries. We see three primary scenarios that could lead to a sell-off in the U.S bond market:

A return to normal times
Strong economic growth
A crisis of confidence in U.S. bonds
Normal times: Why would "normal" times be a threat to the U.S. bond market? In our analysis, one of the best bubble indicators is below-average volatility in an asset or asset class. When tech stocks seemingly went nowhere but up in the late 1990s, when housing prices seemingly went nowhere but up last decade, when we had the hallmarks of a "goldilocks" economy -- respective asset price volatilities were below their historic norms. The 2008 crisis was triggered by a return of risk to the markets: as investors had to price in rising volatility -- for no apparent reason -- banks had to de-lever to make their sophisticated value-at-risk models work. Similarly, as investors more broadly pared down their risk, the credit bubble burst. With regard to the bond market, we only need to return to historic levels of volatility for there to be a potentially rather rude awakening: we have had many yield chasers going out ever further on the yield and credit curves (buying longer-dated and less creditworthy securities) that might run for the hills as volatility picks up in the bond market.

Strong economic growth: Some argue that we can outgrow our challenges, but the looming explosion of entitlement spending makes relying on growth unfeasible. However, our concern is with the fallout higher growth might have on the bond market. We got a glimpse of that earlier this year as a couple of economic indicators came in better than expected, leading to a sharp sell-off in the bond market. Good luck to the Federal Reserve in containing fallout in the bond market if indeed we get the sort of growth Fed Chairman Ben Bernanke is advocating.

Crisis of confidence: If there is one lesson to be taken from the eurozone debt crisis, it is that the only language policy makers appear to be listening to is that of the bond market. Policy makers decide between the political cost of acting versus the political cost of not acting. As such, we are not very optimistic that we will implement true entitlement reform unless and until the bond market forces us to. As indicated, however, should that happen, the risk to the U.S. dollar might be significant.

Obama versus Romney: A key difference promoted between Obama's and Romney's view of the world is the level of government spending. But independent of our political preferences, any level of government spending must be financed through revenue and borrowing. And that's where we have a problem:

Obama's slowing spending growth: Listening to budget experts in support of Obama's policies, we hear a lot about how spending growth has slowed since 2008. The problem with that argument is that spending levels at the outset of President Obama's administration were unsustainably high. Trillion dollar deficits are simply not good enough, even if the rate of growth of such deficits is low. When quizzed on the sustainability of the deficit considering the risk to the bond market, we hear that the U.S. dollar is a reserve currency and, as such, we have plenty of time to get to a more sustainable path. We certainly don't have a crystal ball, and we know that it may be all but impossible to time if and when the U.S. bond market will tell the government that enough is enough. Forecasting when the tech or housing bubbles would burst was also extremely difficult, although the warning signs were there for all to see. However, relying on the bond market behaving is, in our view, bad policy. Any policy maker who agrees that there's a potential risk should set policy to mitigate that risk sooner rather than later. Conversely, any investor who agrees that there's a risk to the bond market should consider taking it into account in his or her portfolio allocation now.

Romney's sustainable budget: Supporters of a Romney presidency are quick to point out how a Romney/Ryan budget leads to a sustainable budget over time. Indeed, the most positive aspect of the proposal is that it puts a budget on healthcare. Many are not aware that the current healthcare system in the U.S. does not have a budget -- it simply lists entitlements: not surprisingly, costs are exploding. One can argue about how one goes about introducing a budget, but the fact that Romney wants to introduce a healthcare budget is extremely important for long-term fiscal sustainability. Because kid you not: Medicare as we know it won't be around in 20 years -- it's mathematically impossible -- there aren't enough rich folks out there to tax to make it work. But the Romney/Ryan budget plan has a key flaw: we believe it's most unlikely to be implemented (before those opposing a Romney/Ryan budget breathe a sigh of relief, please re-read the section on Obama's spending growth). Our pessimism is based not on current polls favoring an Obama/Biden administration, but on the likely stalemate in Congress. Good luck getting a budget through Congress without it being watered down rather severely. But even if Romney/Ryan principles were to prevail, Romney has already made so many concessions, from continued subsidization of student loans to preserving defense spending, that a Romney/Ryan budget is at risk of looking very much like the sort of budget we see anywhere in the world: one that replaces the faces, cuts "wasteful" spending and replaces it with "worthy" spending. Clearly, what is "wasteful" and "worthy" is in the eye of the beholder. But don't worry, as in four years, citizens have the opportunity to vote for change yet again. Unfortunately, we might replace the faces, but the deficits may remain.

Real wages haven't gone anywhere over the past decade. Voters are frustrated. In such an environment, politicians able to distill their messages into Tweets may have better chances of being elected. That is, we believe more populist politicians may increasingly become members of Congress. In that context, the rise of the Tea Party on the right, as well as Occupy Wall Street on the left, is no coincidence. As far as policies are concerned, however, the implication may be that real entitlement reform -- key to making our budgets sustainable -- remains elusive. In the U.S., just as in the eurozone, we may be tempted to "kick the can down the road" until the bond market forces us to tackle our problems.

Until then, we believe inflation is the path of least resistance: the government nominally delivers on promises made, but the real value of entitlements received is eroded. We just point to the most recent debt ceiling discussion where both Democrats and Republicans appeared open to changing the definition of the Consumer Price Index (CPI) to do just that. Investors may want to consider these risks in their portfolio allocation.

Disclaimer: This report was prepared by Merk Investments LLC, and reflects the current opinions of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any investment security, nor provide investment advice.

Happy Anniversary To The All-Time Highs

Five years ago, on October 11, 2007, the Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) reached their all-time highs. On that day, the Dow topped out at 14,198.10, and the S&P 500 topped out at 1576.09. The Nasdaq, of course, reached its all-time high in March of 2000 at 5,132.52. That is a level that, more than 12 years later, the Nasdaq is still more than 40% below.

Interestingly enough, prior to 2007, October was the month investors could most rely on to end bear markets, not start them. According to the "Stock Trader's Almanac 2012," bear markets ending in 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, and 2002 all occurred in October. Additionally, the roughly 20% selloffs that occurred in the major market indices in 2011 also ended in October.

But while October was historically known as the month to end bear markets, it has also been known as the month of nasty surprises. The stock market crashes of 1929, 1987 and 2008 each occurred during October, as did brutal selloffs in 1978 and 1979, and single-day surprises in 1989 and 1997. Moreover, the bull market ending in 2007 peaked in October.

For one reason or another, October has historically marked inflection points in the major U.S. stock market indices. With the fiscal cliff fast approaching, earnings growth for the S&P 500 at its slowest since the bull market began, and forward earnings estimates on a downward path, it is a good time for investors to be mindful of October's role in stock market history. Maybe all the previously mentioned inflection points and brutal selloffs occurring in October is merely a coincidence. And with unconventional monetary policy distorting prices in many parts of the financial markets, perhaps it is futile to spend time discussing seasonalities.

But also worth noting is that as much as investors like to think the stock market prices in known unknowns ahead of time, that is not always the case. Five years ago, when major stock market indices were making new all-time highs, the U.S. economy was just weeks away from officially entering a recession. Furthermore, at that time, financial market stresses from the declining housing market had already appeared. But then, much like today with respect to troubles in Europe and slowing worldwide economic growth, hope ruled the day. Hoping that central banks and policy makers can forever protect the financial markets, driving asset prices ever higher is something in which financial market participants are well versed. Yet when hope in the abilities of central banks and politicians to successfully navigate investors through troubled financial waters becomes the primary driver of rising asset prices, which I contend it is today, then shifts in sentiment can happen suddenly and appear irrational.

Incidentally, for those who find October's role in stock market history of interest, you may like to know that the Dow Jones Industrial Average recently made a new bull market high on October 5 before turning lower, and the S&P 500 challenged its bull market high before turning lower. Will this October join others as a major inflection point?

It appears to me that the U.S. economy and the S&P 500 are far too reliant on three things: unconventional monetary policy, corporate cost cutting initiatives, and Apple's (AAPL) earnings growth. Quantitative easing has been ongoing for more than three-and-a-half years. The goal of quantitative easing is to prop up financial asset prices until a self-sustaining economic recovery takes hold. Yet the diminishing asset price returns from each round of QE appears to indicate that investors are losing patience. In order to continue propping up financial markets, including stocks, the Fed will need to print money in ever greater amounts. Or corporate earnings growth can ramp up and remove from the Fed the responsibility of propping up asset prices. Yet after a few years of impressive cost cutting, corporations are and will continue to become more reliant on revenue growth to boost earnings.

With anemic wage growth in the United States, a slowing economy in China, and very serious structural problems in Europe, at this time, betting on enough revenue growth to drive stock prices significantly higher from here does not seem appropriate from a risk-reward standpoint. One caveat to that would be if Apple were to crush earnings expectations. Given its top weighting in the S&P 500, its near 20% weighting in the Nasdaq 100, and the fact that Apple's earnings growth has masked widespread weakness in the broader growth of S&P 500 earnings, its earnings report later this month will be the one to watch.

If you are an investor with a time horizon measured in years rather than weeks or months, it makes very little sense to put new money to work in broad market indices at this time. Before doing so, I would want to see not only a clean, consensus-crushing earnings report from Apple, but also some indication that the fiscal cliff and the fast-approaching debt ceiling debate will be dealt with in a way that helps markets avoid the same type of brutal selloff experienced last summer. Traders find short-term opportunities each and every day. But if you are one of the millions of investors with multi-year time horizons, using index funds as a means of gaining exposure to stocks, now is not the time to put your foot on the accelerator.

There is virtually no chance that stocks have priced in the earnings declines that would result from a failure to resolve the fiscal cliff. Likewise decisions made during the upcoming debt ceiling debate could also have serious consequences on future corporate earnings growth. It is also highly unlikely that stocks have priced in any type of negative outcome regarding the European situation. Those are all very real risks in the months ahead.

What stocks have priced in is a Fed willing to do moderate levels of QE on an ongoing basis. Stocks have also priced in the expectation that politicians will not allow the fiscal cliff to occur on a permanent basis. While it is hard to believe that Congress will accomplish anything in December, there is widespread discussion about the fiscal cliff happening on a temporary basis in January. Finally, stocks have also priced in current forward earnings growth projections of 13.41% over the next twelve months.

Unless we get a stellar earnings season including guidance that gives investors reasons to put new money to work, investors are really just buying on the hope for continued money printing. In that case, I would rather buy gold (GLD). And when the time does come to once again invest heavily in stocks, it will likely correspond with some sort of resolution out of Europe. In that case, investors will likely make more money buying the more-than-4%-yielding MSCI EAFE Index Fund (EFA) than they would buying the S&P 500.

For now, remain on hold, patient, attentive to the upcoming challenges, and mindful of October's role in history.

Today's oil price

$92.41 per barrel

Daily change of 0.02 ( 0.02% )

Oil Quote Updated Oct-10-12 9:00 AM

Fed chose mortgage bonds consolidate the gains of Housing

Restructuring of the Federal Reserve its latest stimulus program on the purchase of mortgage bonds after members agreed to help the nascent housing recovery was a good way to lift the broader economy.

Meeting Minutes Fed September 12-13 published on Thursday also shows that most of the members now agree that linking an increase in interest rates in the short-term future economic measures, such as the unemployment rate specific, can be effective. But members agreed to hold off on the change to work on the details.

After the meeting, the Fed said it will keep buying mortgage bonds until the labor market showed a significant improvement. Fed also extended its plan to keep the benchmark interest rate on short-term interest near zero until 2015 and mid-left open the possibility of taking further steps.

The Fed bought already more than $ 2 trillion in bonds since the financial crisis of 2008. The latest program seeks to spend $ 40 billion a month to buy mortgage securities without the end of the deadline.

Many participants agreed at the meeting that more purchases of bonds that would provide support to the economy through downward pressure on long-term interest rates. To encourage more borrowing and spending, which drives growth.

According to the minutes, members of the Fed compared the effectiveness of buying Treasuries to mortgage-backed securities.

"Some participants suggested that all things being equal, (mortgage bonds) purchases could be better because it is more directly support the housing sector, which is still weak, but showed some signs of improvement in recent times," according to the minutes.

The few members uncertainties buy additional bonds would help. And raised fears that buying more bonds could increase the risk of higher inflation later.

And mortgage rates were less than 4 percent throughout the year. While rising home sales, they remain much lower than healthy levels.

On Monday, he defended Chairman Ben Bernanke aggressive policies during a speech to the Economic Club of Indiana. Bernanke said the Federal Reserve needs to cut borrowing rates in the long term, because the economy is not growing fast enough to reduce the high rates of unemployment.

He also sought to reassure investors about the timetable for the Fed to save them in the short term rate is very low. He said the plan does not mean that the Fed is expected to be weak economy until 2015, indicating that policy makers plan to keep rates low well after the economy strengthens