Look Out for the Resets

ARM reset schedule. Click here

Translation: More pain ahead as ARMs reset at higher rates.

Don't Walk Away from the Dollar, Run

Syria drops dollar peg. Who's next?

Link

More Statistical Manipulation

Had been intending to post something on the subject of employment statistics and their intentionally misleading nature. Fortunately, someone did the work for me. Good article- check it out.

Link

Are You Ready for $5 Gas?

You should be. It seems all but inevitable. Maybe this summer, maybe not, though the farther out on the horizon you look the greater the likelihood. Our refineries are overstretched, not to mention frequently blowing up. There is a secular bull market in oil and supply is peaking. No coincidence, I'm sure. We've picked all the low hanging fruit and new energy sources will be increasingly difficult to exploit i.e. more expensive.

Hurricane in the gulf? $5 Gas.

Add to that, a weakening dollar and geopolitical concerns. The world's oil reserves are primarily in unstable regions. Think Venezuela or Nigeria. Iran and it's proximity to the Strait of Hormuz, through which 20% of the world's oil passes. Consider too that we face increased competition for resources due to growth around the world. There are an awful lot of Chinese buying their first cars. Chavez doesn't like our foreign policy so he'll sell his oil to China.

Bad news for GM. It's time to start planning for a future with higher gas prices. This country is going to need more public transportation. We're going to need to figure out how to grow and manufacture more goods locally instead of shipping in them in from across the globe.

This Week's Stock Pick

"The Skeptic" has been wildly bullish on precious metals generally, and silver specifically, since about 2001. This is how "The Skeptic" makes his money, by seeing the future. You may ask how it is that "The Skeptic" can see the future. Well that's none of your damn business.

Silver has been in a consolidation phase for just over a year now. Meanwhile, central banks around the world have continued to print money, the silver ETF (SLV) has continued to drain supply from a tight market and there have been a range of new products introduced that use silver. "The Skeptic" has been patiently waiting for silver to end this consolidation in anticipation of an explosive move in prices. That time has not yet come but it appears imminent.

Be aware...at some point silver is going to go ballistic. In anticipation of silver completing this current consolidation "The Skeptic" is ready to start putting some money to work. As a result this week's pick is SLW- Silver Wheaton. Buying Silver Wheaton is a direct bet on higher silver prices. Just like the commodity itself SLW has been consolidating for a year. You can bet that when this stock gets a couple closes above the $12 mark it will gain serious momentum. Currently SLW is sitting right at that magical $12 mark.

Disclaimer: Author does own this stock and is not a broker. Should you buy this stock based on this post you might lose all your money and end up living in the street.

More Debate Coverage

The Democrats were in New Hampshire tonight for their latest debate. CNN's coverage was loaded with second-rate commentary. Really contrasted poorly with MSNBC's coverage of their hosted debate. However, the questions to the candidates were better than previous debates. They wasted less time, relatively speaking, with assinine questions. Here is a brief synopsis, by candidate:

Hillary- She faced a lot of jabs tonight. Everyone seemed prepared to take their shot. She did reasonably well considering. As the frontrunner she appropriately played it safe. The only thing Hillary said that made me curse at the TV was a reiteration of her whole "I didn't make a mistake authorizing force in Iraq but if I knew then what I know now..." That's balderdash. "The Skeptic" does not get national intelligence breifings, nor does he have a staff of fact-checkers, yet he still would have told you invading Iraq was a bad idea at the time. Why? Mostly common sense. So either she has bad judgement or voted as she did in pure political calculation, which is worse. She also likes to claim that no one thought Bush would use the authorized force because he claimed he would let inspectors finish their work. So she is a bad judge of character to boot.

Obama- He fared better in the debate format that he previously appeared uncomfortable with. He spoke eloquently yet offers no real leadership. He's done very little to distinquish his positions from Hillary's.

Edwards- He was aggressive. He attacked Hillary. He mixed it up with Obama. Well done. I appreciate the fact he admitted more than once he was wrong to vote for Iraq war authorization. It's an easy dig at Hillary but nonetheless refreshing. They never even covered Edwards' big issue- poverty.

Biden- Did a lot to help himself tonight. He spoke forcefully about Darfur. Appeared passionate about the issues generally. Biden is likable and intelligent yet doesn't offer much beyond foreign policy experience. In this crowd you could do a lot worse than Biden.

Richardson- Likeable but not the least bit presidential. No longer worthy of consideration.

Dodd- yawn

Kucinich- "The Skeptic" loves the fact that this guy doesn't pander. Someone in the audience asked a question about what we can do to rebuild the military, which was directed to him. Part of his answer was that we should reduce defense spending. Overall, it seemed he, along with Biden and Edwards, fared the best tonight.

Gravel- Vitriolic as ever, Gravel continued throwing bombs. I'm sure, beyond this election cycle, the parties will find a way to exclude guys like Gravel or Kucinich or Ron Paul from future debates. That would be a shame. You'll hear more truth spoken by these fringe candidates then all the others combined.

Ron Paul- The People's Champ

"I don't think we have a republic anymore," he tells me, sitting up in his chair. "I think we have a very domineering federal government, where we have a world empire we have to manage every single day."

http://www.salon.com/news/feature/2007/06/02/ron_paul/?source=whitelist

GDP Shrivels

First quarter GDP came in at 0.6%. The slowest rate in more than four years. When you consider the government's wild underestimation of inflation that GDP number is, in real terms, probably negative. So the economy contracted in the first quarter.

Signs of Impending Doom

Lake Okeechobee is on fire. For those unfamiliar, Okeechobee is the second largest freshwater lake in the continental U.S. with a drainage basin that covers over 4,600 square miles. The water levels at "Big O" are at their lowest- EVER. The lake has receded far enough for 5,000+ acres of former lake bottom to actually catch on fire. The fire remains mostly inaccessible to firefighters as they are not really equipped to fight fires in lakes.

Maybe hurricane season, which starts June 1, will bring much needed rain to Floridians.

ATM Broken

The housing ATM is out of service. Those people who have been living beyond their means thanks to a rising tide of home equity had better start saving. The whole refinance game is kaput. What are you going to do now if you've been living comfortably by using your house as an ATM? Interest rates are higher and home prices are down in many cases. Time to stop going out to dinner three times a week. Time to stop buying all that crap you don't need...and charging it.

Equity withdrawal has certainly provided a wind in the sails of our economy. Without it we won't be seeing much growth in GDP. Furthermore, most of the nation's job growth the last couple years has been housing related. Brokers, appraisers, agents, roofers, electricians. Here in SW Florida you couldn't walk five feet without running into a mortgage broker and they were generally obnoxious and arrogant about their new found success. The number of available jobs in housing related sectors will not grow but contract.

Belt tightening time. Prices are drifting lower, rates are drifting higher, there is enough inventory to choke on and lending standards are being tightened. There has already been a lot of bottom calling. Strikes "The Skeptic" as premature.

Inflation Obfuscation Redux

Link-InflationArticle

Article:
Paul Volcker, the former Fed chairman widely credited for putting the clamp on the runaway inflation of the 1970s, once referred to rising prices as "a cruel and maybe the cruelest tax, because it hits in an unexpected way, in an unplanned way, and it hits the people on a fixed income hardest."

Comment:
Just for the record "The Skeptic" will take John Williams' (of Shadow Stats) numbers over those reported by our government. At the very least, Williams is using a consistent methodology instead of moving the goalposts.
Also, inflation is the enemy of a bondholder. Of late, bond prices have traded off with yields scooting higher. We've experienced a secular bull market in bonds. When that ends (now?) rates will be heading higher for years. It should be clear the implications for a nation up to it's ears in debt.

Dollar-Induced Indigestion

Recently Kuwait abandoned it's currency link to the dollar in attempt to quell inflation there. Many countries, including many in the Middle East, have home currencies linked directly to the dollar- the world's reserve currency. We've all heard much bluster about China's similar dollar peg.

This is an event that is clearly bearish for the dollar. If other Middle Eastern nations follow suit, for instance Saudi Arabia or Qatar where inflation was 11.83% in 2006, the dollar will be in more trouble. Central banks around the world have satiated their appetite for dollars.

Bloomberg article. Enjoy.

GAO Peak Oil Study

"The Skeptic" would consider this report generally optimistic. Yet, it still makes for some disturbing reading. Here are some highlights:

Most studies estimate that oil production will peak sometime between now and 2040.

Key alternative technologies currently supply the equivalent of only about 1 percent of U.S. consumption of petroleum products, and the Department of Energy (DOE) projects that even by 2015, they could displace only the equivalent of 4 percent of projected U.S. annual consumption. In such circumstances, an imminent peak and sharp decline in oil production could cause a worldwide recession. If the peak is delayed, however, these technologies have a greater potential to mitigate the consequences. DOE projects that the technologies could displace up to 34 percent of U.S. consumption in the 2025 through 2030 time frame, if the challenges are met.

However, there is no coordinated federal strategy for reducing uncertainty about the peak’s timing or mitigating its consequences.

Historically, U.S. oil production peaked around 1970 at close to 10 million barrels per day and has been generally declining ever since, to about 5 million barrels per day in 2005. While recent discoveries raise the prospect of some increases in U.S. oil production, significant reductions in world oil production could still have important consequences for the nation’s welfare. The United States imported about 66 percent of its oil and petroleum products in 2005, and the U.S. economy—particularly the transportation sector—depends heavily on oil. Overall, transportation accounts for approximately 65 percent of U.S. oil consumption. New technologies have been introduced that displace some oil consumption within the sector, but oil consumption for transportation has continued to increase in recent years.

For example, more than 60 percent of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain oil exploration and production.

According to IEA, most countries outside the Middle East have reached their peak in conventional oil production, or will do so in the near future. The United States is a case in point. Even though the United States is currently the third-largest, oil-producing nation,6 U.S. oil production peaked around 1970 and has been on a declining trend ever since.

Oil accounts for approximately one-third of all the energy used in the world. Following the record oil prices associated with the Iranian Revolution in 1979-80 and with the start of the Iran-Iraq war in 1980, there was a drop in total world oil consumption, from about 63 million barrels per day in 1980 to 59 million barrels per day in 1983. Since then, however, world consumption of petroleum products has increased, totaling about 84 million barrels per day in 2005. In the United States, consumption of petroleum products increased an average of 1.65 percent annually from 1983 to 2004, and averaged 20.6 million barrels per day in 2005, representing about one-quarter of all world consumption. EIA projects that U.S. consumption will continue to increase and will reach 27.6 million barrels per day in 2030.

Recently, for example, a large discovery of oil in the Gulf of Mexico made headlines; however, this potential wealth of oil is located at a depth of over 5 miles below sea level, a fact that adds significantly to the costs of extracting that oil.

Estimates of how much oil remains in the ground are highly uncertain because much of these data are self-reported and unverified by independent auditors;

For example, IEA believes that oil from nonconventional sources—composed primarily of Canadian oil sands, extra-heavy oil deposits in Venezuela, and oil shale in the United States—could account for as much as 7 trillion barrels of oil, which could greatly delay the onset of a peak in production. However, IEA also points out that the amount of this nonconventional oil that will eventually be produced is highly uncertain, which is a result of the challenges facing this production.

The timing of peak oil is also difficult to estimate because new sources of oil could be increasingly more remote and costly to exploit, including offshore production of oil in deepwater and ultra-deepwater.

Alberta, Canada, contains at least 85 percent of the world’s proven oil sands reserves. In 2005, worldwide production of oil sands, largely from Alberta, contributed approximately 1.6 million barrels of oil per day, and production is projected to grow to as much as 3.5 million barrels per day by 2030. Oil sand deposits are also located domestically in Alabama, Alaska, California, Texas, and Utah. Production from oil sands, however, presents significant environmental challenges. The production process uses large amounts of natural gas, which generates greenhouse gases when burned. In addition, large-scale production of oil sands requires significant quantities of water, typically produce large quantities of contaminated wastewater, and alter the natural landscape.

According to our analysis, 85 percent of the world’s proven oil reserves are in countries with medium-to-high investment risk or where foreign investment is prohibited, on the basis of Oil and Gas Journal estimates of oil reserves. (See fig. 8.) For example, over one-third of the world’s proven oil reserves lie in only five countries—China, Iran, Iraq, Nigeria, and Venezuela—all of which have a high likelihood of seeing a worsening investment climate. Three countries with large oil reserves—Saudi Arabia, Kuwait, and Mexico—prohibit foreign investment in the oil sector, and most major oil-producing countries have some type of restrictions on foreign investment. Furthermore, some countries that previously allowed foreign investment, such as Russia and Venezuela, appear to be reasserting state control over the oil sector, according to DOE.

Factors that create uncertainty about the timing of the peak—in particular, factors that affect oil exploration and production—also create uncertainty about the rate of production decline after the peak. For example, IEA reported that technology played a key role in slowing the decline and extending the life of oil production in the North Sea. Uncertainty about the rate of decline is illustrated in studies that estimate the timing of a peak. IEA, for example, estimates that this decline will range somewhere between 5 percent and 11 percent annually.

In addition, corn and cellulosic ethanol are more corrosive than gasoline, and the widespread commercialization of these fuels would require substantial retrofitting of the refueling infrastructure—pipelines, storage tanks, and filling stations. To store ethanol, gasoline stations may have to retrofit or replace their storage tanks, at an estimated cost of $100,000 per tank. DOE officials also reported that some private firms consider capital investment in ethanol refineries to be risky for significant investment, unless the future of alternative fuels becomes more certain. Finally, widespread use of ethanol would require a turnover in the vehicle fleet because most current vehicle engines cannot effectively burn ethanol in high concentrations.

Federal agency efforts that could contribute to reducing uncertainty about the timing of a peak in oil production or mitigating its consequences are spread across multiple agencies and are generally not focused explicitly on peak oil issues. Federal agency-sponsored studies have expressed a growing concern over the potential for a peak, and officials from key agencies have identified options for reducing the uncertainty about the timing of a peak in oil production and mitigating its consequences. However, there is no strategy for coordinating or prioritizing such efforts.

GAO.pdf

Well Said

Excerpt from John Edwards' speech at the Council on Foreign Relations:

"The president has played political brinksmanship over the war in Iraq time and time again. He refuses to acknowledge the futility of his approach, disregards the clear message sent by the American people last fall, and falsely claims that the only way for Congress to support the troops is to prolong the war. That's just not true. Congress can support the troops and end the war, which is exactly what the bill they sent the president last month would have done. When the president vetoed that bill, it was the president alone who was blocking support for the troops. Nobody else.
Any compromise that funds the war through the end of the fiscal year isn't a compromise at all, it's a capitulation. As I have said repeatedly, Congress should send the president the same bill he vetoed again and again until he realizes he has no choice but to start bringing our troops home. "

Democrats Play It Safe

The democrats caved in. The war spending supplemental will reach Bush's desk with little more than progress reports in the way of added accountability. Democrats, facing a Memorial Day weekend with unfunded troops, made the necessary political calculation.

Apparently we will now be looking forward to September when the good general, Petraeus, reports progress and advises us on the best course going forward. Then we'll go from there. "The Skeptic" has a problem with this. First, generals don't set policy. Civilian officials set policy and generals execute. We should not be waiting around for some general to tell us what to do. Second, what do we think the general is going to say? "We can dig in and prevail victorious." No general is going to say that "we've lost." Generals get paid to fight. War is good for business.

Dubya seems determined to drop this war in the next president's lap. That could be a liability for republican presidential candidates since they are so hawkish. How do you remain a war-mongering hawk while distancing yourself from Iraq? It might be to the advantage of democratic candidates, ex. Hillary who is herself a hawk. The longer the war goes on the bigger an issue it becomes.

Sure, Hillary pays lip service to the anti-war voters but she is a hawk through and through. She only came around to her current position of opposition to the war when it became decidedly fashionable to do so. Furthermore, she wants to sustain military bases in Iraq indefinitely. So if she becomes the nominee anti-war voters could be unrepresented in the upcoming election.

Inflation Obfuscation

Last week our trusty government released it's inflation stats for April. Overall, consumer prices are said to have rose 0.4% from March and 2.6% from a year earlier. The closely watched "core" number, excluding food and energy, came in at 2.3%.

First off, it's amazing that Wall Street, and more specifically our bond markets, fail to question these numbers. Does anyone really think inflation is running below 3%? Guess it's not surprising seeing as Wall Street also buys in to this whole "core" number absurdity.

In reality, inflation is running about 5%. At least. This does not show up in government statistics because the numbers are tortured. The goal posts are being moved. We are engineering new and creative ways to eliminate inflation through statistical wizardry. Our government's numbers, in this case, are so unrealistic as to be deemed useless.

This Week's Stock Pick

Tough decision this week. "The Skeptic" sees many ways to exploit our frothy markets. The original list was 18 stocks. Brought that down to four. After further deliberation...EMC is the pick for this week. Similar to last week's pick EMC is completing a long term consolidation. In this case, very long term. EMC has traded in a range since 2003! Currently trading at 15.82, the very top of it's range, this stock appears poised for higher prices. A decisive move above 16 would likely bring in more buyers.

Disclosure: "The Skeptic" owns this stock and is not a broker. Should you decide to buy this stock you may lose money. It would serve you right.

Better Build It Higher

So there is a lot of talk of a border fence. To keep the Mexicans...I'm sorry, the "illegal immigrants" out. Apparently the Republican debate the other night on Fox featured these so-called candidates falling all over each other to build a fence. To keep out those Mexicans.

Obviously, this is not a "homeland" security issue otherwise we'd be building a wall in the north too. Maybe we could just build a bridge from Mexico to Canada, like a wildlife crossing, and the Mexicans would go take Canadian jobs.

The jobs are often described as "jobs that Americans won't do". Sure, these are menial, labor-intensive jobs but not jobs Americans won't do. Who did these jobs before Jose came across the border? No, these are jobs few Americans would do for five dollars an hour.

Before we get all high and mighty and feeling superior, we should consider that we are a nation of immigrants. We stole this land from the Indians. Maybe the Mexicans will steal it from us and build pyramids. That would be cool. Or maybe, their hard work would make America better. We need these hungry people. The rest of us are too fat, happy and entitled.

Borders are just lines on a map. Generally arbitrary. How much money are we going to waste on building a fence on ours? And don't we think that maybe the Mexicans have a ladder? They could lay on top of one another as a human ladder. Did we consider that? We are going to have to build that wall at least two families high. That's like 30 ft.

Truth is, a lot of Americans don't like Mexicans. The reality is we can't bus them all home. We can't build a fence that will keep them out. We can't stop them from multiplying. Maybe we should focus instead on teaching them English. That way "The Skeptic" could communicate to them to stop running over the sprinklers.

Televangelist Jerry Falwell Good As Dead

"I really believe that the pagans and the abortionists and the feminists and the gays and the lesbians, who are actively trying to make that an alternative lifestyle, the ACLU, People for the American Way — all of them who try to secularize America — I point the finger in their face and say, 'You helped this happen.'" - Falwell on 9/11

This Week's Stock Pick

"The Skeptic" finds little in this market to get truly excited about right now. That being said, energy stocks appear poised to resume their outperformance. Coal and natural gas stocks have been ripping. "The Skeptic" is watching several natty gas stocks that appear close to breaking out of extended consolidation patterns. One such stock is EP -El Paso. El Paso has been trading sideways for a year now. Slowly drifting to the top of it's range and in a sector that looks good is, in this case, enough to make "The Skeptic" a buyer. Perhaps the consolidation is not over and "The Skeptic" has been early in this name before. Better early than late. EP closed at $15.40 today, up a touch.

Disclaimer: "The Skeptic" owns this stock and is not a broker. Do not buy this stock based on anything you have read on this blog. If you do you are moron who would be better served indexing.