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HOW SECURE ARE AMERICA’S OIL SUPPLIES?

HOW SECURE ARE AMERICA’S OIL SUPPLIES?

Emerging Markets: Stocks Revive as Interest Hikes Halt

During the past year emerging market governments have been raising interest rates to cool down mounting inflation. Stocks in many countries cooled in the process, and were stuck in stall mode since late 2010.

We believe the interest hikes have had their effect. In anticipation of an end to climbing interest rates, stock markets in several emerging countries have come to life again. These next few months may provide a window where inflation pressures may lessen, although we believe we are still in a long period of rising inflation. Once investors become convinced that the interest rate increases will indeed stop in the coming months, the markets should rebound vigorously.

Most investors know that higher interest rates decrease the availability of reasonably-priced capital for businesses and reduce an economy’s ability to grow. When rates are high, investors typically look to short-term government bonds or bank deposits that can better compete with stocks on return for money. The perception that rates are no longer on the rise is a red light turning green for stock investors, since lower prices are usually to be found after a period of rising rates has halted.

We are seeing a green light in both India and Malaysia this week, and we’re adding them to our buy list.


Washington Wants a Lower Dollar

Sadly, American policymakers are pursuing a lower dollar as a key to their strategy in tackling the cloudy fiscal future of the country. Here’s the thinking:

? Depreciated dollars will help ease the pain of paying back the country’s huge debt burden, and
? Lower dollars will help the U.S. create jobs by increasing exports. Better managed currencies, even the Euro, will probably continue to rise versus the dollar.

The dollar’s price target keeps receding because the politicians in Washington do not seem to be able to do — or want to do — what’s necessary: cut costs. Austerity is a political poison pill. Politicians first and foremost, of course, want to be re-elected. Beyond Washington, it’s pretty much the same; the only difference is that policymakers at the state and municipal level are even more clueless, hapless, and helpless.

QE 2 is supposed to terminate at the end of June. You can bet it will be followed by QE 3 or something of that ilk that further debases the dollar. You may not see it right away, but have no doubts that it will surely come: another debt-expanding infusion necessitated by low employment and the upcoming election season, and produced by the officials at the Fed who believe their job is to create an economic recovery and combat deflationary forces.

Following in Japan’s Deflationary Footsteps

Our long-term view is that much of the developed world is following Japan into a deflationary funk. Problems in the Japanese banking system resulted from unwise lending, excessive leverage and real estate speculation, and a foreign investment boom. The situation has continued festering because banks did not write off bad debts after the bank crisis. The bad loans remained on the books at overinflated values, thus starving needed access to capital by growing businesses. The banking landscape is thus populated with conked-out “zombie” banks in no position to stoke economic growth.

Q: Why didn’t they write off the sour notes?
A: Pride, saving face (and bankers’ rear ends, as well), and hope.

The Japanese missed the signals that they were falling into a deflation. They failed to realize that asset prices were NOT going to return to the highs and bail out over-levered balance sheets. They realize it now, but they are also realizing it is very hard to pull out of a deflationary cycle.

Today, the U.S. and the developed countries of Europe are making some of the same mistakes that the Japanese made. A long-term deflationary problem is taking shape at the same time that an inflationary problem is developing in the emerging world.

All this leads us to believe that the U.S. is headed into an extended deflationary environment and a short-term inflationary problem. The governors of the Fed are not dummies. They are well educated and informed. They see where the U.S. is headed and they are afraid of it. Thus they will implement a new QE before the end of 2011 or early in 2012.

In the meantime the QE instituted by the Japanese authorities to protect their economy and banking system will leak out to the rest of Asia and the world. Their action helps support emerging markets by adding to worldwide liquidity.

In summary, countervailing forces are impacting world markets today. On the positive side, liquidity is still flowing in; slower in the U.S. and faster in much of the emerging world. On the negative side, there is a seasonal bias toward market correction at this time of year (see our last letter) and a growing concern that QE is coming to an end in June and no new monetary stimulus plan has been announced.

Oil Check: Is the Supply Safe and Secure?

Last week we reviewed the Middle East boiling pot in relation to oil transport through key regional chokepoints. This week we take a brief look at the four biggest U.S. oil suppliers and assess the security of these critical lines of supply. We present them here in order of importance.

Canada
Canada supplies about 2.2 million barrels per day to the U.S. These supplies are secure and growing.

Mexico
Mexico’s 1.2 mm barrels supplied to the U.S. is secure for now; but becoming more limited as Mexico’s crude oil production has declined steadily in recent years, and is projected to decline further.

Saudi Arabia
Saudi Arabia’s 1.1 mm barrels are currently secure, but what does tomorrow hold?

Political upheaval in the countries around Saudi (including Bahrain, Yemen, and Egypt) is more than a little unsettling. Instability and unrest are being fomented by Iran and its proxies in order to undermine Saudi Arabia and bring it under closer alignment with the interests of Tehran. Those interests are to decrease the oil supply from Saudi to the U.S., and to decrease American influence in the Middle East.

Speaking of U.S. influence in the Middle East, you may like to check out the following article in this past weekend’s Wall Street Journal discussing why forcing Western style democracy in the Middle East is not necessarily a good idea.  Please click below for WSJ article.

WSJ Article

Nigeria

Nigeria exports about 968,000 barrels per day to the U.S, which is about 10% of U.S. imports. These supplies are somewhat secure, but… Elections are coming up in Nigeria over the next few weeks. During the last national elections in 2007 a series of attacks were carried out against the country’s oil infrastructure. Fighting and rebel attacks shut down about half of Nigeria’s oil production and most of its exports, and triggered a rise in oil prices. Last month, a rebel umbrella group called The Movement for the Emancipation of the Niger Delta struck an oil facility run by a European company and pledged more attacks would follow. Will we see a repeat of 2007? What happens in Nigeria could have a lot to say about the price of light sweet crude up ahead.

Commodities

Commodities are strong. Investors worldwide know that the fall of the dollar is likely to continue. China knows this and is continuing to buy resources all over the world, spending their excess dollars to do so. Long-term investors also know that the Japanese yen will fall due to the massive intervention and printing of yen taking place in Japan to support the banking system and Japanese exports during the aftermath of the March disasters.

We are adding a new currency recommendation this week. We have been long the Japanese equity market, but have been hedging out the yen exposure. Now we are recommending that investors sell the yen short outright versus the U.S. dollar, or better yet, versus one of the good currencies that we have been recommending as buys for the past several months.

Summary

We are starting to take a more positive view of some emerging markets. India and Malaysia responded to rising inflation in recent months with monetary tightening. We believe the inflation data may ease and the interest rate increases may pause. After pulling back in late 2010 and early 2011, these markets are headed for higher ground again, so we are putting some of our cash to work in them.

As just mentioned, investors can short the Japanese yen. The Japanese need it to go lower to help recovery, and will continue to print new money until they get the results they seek.

We continue to believe in energy, gold, Japan, Canada and Colombia. Please see the list below for our current and closed market, currency, and commodity recommendations.


Investment

Date

Date

Appreciation/Depreciation

 

Recommended

Closed

in U.S. Dollars

Commodity Market Recommendations

     

Gold

6/25/2002

Open

+348.7%

Oil

2/11/2009

Open

+200.5%

Corn

12/31/2008

3/3/2011

+81.0%

Soybeans

12/31/2008

3/3/2011

+44.1%

Wheat

12/31/2008

3/3/2011

+35.0%

       

Currency
Recommendations


     

Short
Japanese Yen 

4/6/2011

New

 


Long
Singapore Dollar

9/13/2010

Open

+6.1% 


Long
Thai Baht

9/13/2010

Open

+7.3%


Long
Canadian Dollar

9/13/2010

Open

+7.0%


Long
Swiss Franc

9/13/2010

Open

+9.7%


Long
Brazilian Real

9/13/2010

Open

+6.0%


Long
Chinese Yuan

9/13/2010

Open

+3.2%


Long
Australian Dollar

9/13/2010

Open

+11.6%

       

Equity Market
Recommendations


     

India

4/6/2011

Re-Opened

 

Malaysia

4/6/2011

Re-Opened

 

Canada

3/24/2011

Re-Opened

+2.4%

Colombia 


9/13/2010 

Half Original Position sold

+2.3%

Australia

2/15/2011

Open

+4.5%

Japan

2/15/2011

Open

-10.8%

U.S.

9/9/2010

3/11/2011

+18.1%

Canada

12/16/2010

3/11/2011

+7.9%

South Korea

1/6/2011

3/3/2011

-2.9%

China

9/13/2010

1/27/2011

+5.0%

India

9/13/2010

1/6/2011

+7.9%


Singapore

9/13/2010

12/16/2010

+4.8%

Malaysia

9/13/2010

12/16/2010

+1.3%

Indonesia

9/13/2010

12/16/2010

+9.5%

Thailand

9/13/2010

12/16/2010

+11.9%

Chile

9/13/2010

12/16/2010

+8.9%

Peru

9/13/2010

12/16/2010

+32.2%