-->Gasbackwards / The Daily Reckoning
Ouzilly, France
Wednesday, 30 July 2003
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*** What have we become? You may be tired of hearing the
question, dear reader... but we haven't tired of asking
it...
*** Consumers suffer panic attacks... Dow at 1,287? Now
that's a bear market!
*** Poor Alan Greenspan... should have quit when he was
ahead. The bubble in the Internet is back. Another chance
to make some money, whoopee!
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What have we become, dear reader?
The 'world's mouth.' That is what the Dollar Standard has
made us.
It tempts us to gobble up the world's goods and services -
believing we'll never really have to pay for them. We've
become the consumers of first and last resort. Our people
are besotted by it. And our economists have gone a little
goofy.
We heard from one member of the profession, recently, who
explained that consumption was the very definition of
wealth. What was prosperity, he wanted to know, but the
ability to consume?
We don't believe it. It is not the ability to consume that
defines a rich man, but his ability to produce. And while
the Dollar Standard lured the mouth to consume, it
encouraged the rest of the world to bulk up its production.
Americans end up with the flabby detritus of modern life -
broken VCRs, gas-guzzling SUVs, mortgages and empty
champagne bottles - while China adds more jobs, factories,
and savings!
Daily Reckoning readers may be getting tired of hearing us
say this, but we have not yet gotten tired of saying it:
nothing is as dangerous as good luck. America had the
extraordinary luck to have its own money taken up as the
world's reserve currency. Now, it is being ruined by its
own good fortune.
Over to Eric Fry on Wall Street. If America is the world's
mouth, Eric must be right there on the beguiling,
seductive, sensuous lips...
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Eric Fry, checking in from Manhattan...
- What has become of the intrepid American consumer? Is he
losing his nerve? Whatever happened to that cocksure fellow
who never hesitated to spend money he didn't have on things
he didn't need? And where is the bravado that inspired him
to squeeze every last drop of equity out of his house in
order to buy snowmobiles, gourmet tequila and overvalued
tech stocks?
- The consumer is still with us, of course, but his
confidence is waning a bit. The Conference Board's Consumer
Confidence Index fell to 76.6 in July from 83.5 in June -
it's the lowest level since March's 61.4.
-"The rising level of unemployment and sentiment that a
turnaround in labor market conditions is not around the
corner have contributed to deflating consumers' spirits
this month," says Lynn Franco, Director of The Conference
Board's Consumer Research Center."Expectations are likely
to remain weak until the job market becomes more
favorable."
- The percentage of consumers claiming jobs are"hard to
get" rose to 33.1% from 31.9%, while those claiming jobs
are"plentiful" dropped to 10.5% from 11.2%... The
proportion of consumers anticipating an increase in their
incomes declined to 15.7% from 17.1%.
- It was inevitable, we suppose. When more than two million
manufacturing jobs disappear and seven trillion dollars of
stock market wealth evaporates, even the most confident of
consumers may succumb to occasional anxiety attacks. Add
soaring interest rates into the mix and it's a wonder that
ANY consumer retains the moxie to keep on borrowing and
spending.
- But Chairman Greenspan declares that household finances
are in tip-top shape."The prospects for a resumption of
strong economic growth have been enhanced by steps taken in
the private sector over the past couple of years to
restructure and strengthen balance sheets," the Federal
Reserve chairman said in his recent testimony to Congress.
"Nowhere has this process of balance sheet adjustment been
more evident than in the household sector." We say,
"Balderdash!"
- Even with the benefit of generational-low interest rates,
the household"debt-service burden" -- the percentage of
consumers' monthly income spent on paying debt -- is still a
plump 14 percent, where it has been stuck since 2001. For
perspective, the debt-service burden immediately prior to
the past two consumer spending booms was closer to 12
percent, according to Merrill Lynch chief U.S. economist
David Rosenberg.
- What's more, in the olden days of the Bush the Elder's
Administration, folks used to save a bit more money than
they do today, under Bush the Younger. The household
savings rate was 7.7 percent in the last month of the 1990-
91 recession, compared with just 3.5 percent now."As a
nation, we have come out of the recession overspent as
opposed to underspent," says Rosenberg. Hard to quarrel
with that assessment.
- Northern Trust economist Paul Kasriel backs up
Rosenberg's analysis by pointing out that in every
recession since World War II, the ratio of household debt
to assets has fallen. In the most recent recession,
however, the debt/asset ratio skyrocketed, setting a record
high of more than 18 percent in the first quarter of this
year.
-"Households have not meaningfully repaired their balance
sheets since the onset of the last recession," Kasriel
wrote in a recent research note."Households are not
'better positioned' than they were earlier to boost outlays
as their wariness about the economic environment abates. If
anything, they are more poorly positioned to do so."
- Furthermore, the steady rise of bankruptcies suggests
that consumers never really stopped borrowing and spending
throughout our mini-recession. Instead, they continued to
borrow and spend, just like they did during the boom times
of the late 1990s. In present-day America, it's all-
consumption-all-the-time.
- Another unique feature of America's recent shallow
recession is the correspondingly shallow bear market in
stocks. The Dow Jones Industrial Average -- like a Timex
watch - has"taken a lickin', but keeps on tickin'." It's
true that the blue chips suffered a 38% loss from their
all-time high of 11,722 in January of 2000 to the bear
market low of last October. But it's also true that the
1929-edition bear market erased a whopping 89% of the Dow's
peak value.
-"Using the Dow's high of 11,700 made in 2000,"
SafeHaven.com observes,"if this bear market were to match
the severity of declines made after the crash of 1929, the
Dow would bottom at 1,287"... Now THAT'S a bear market!
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Back in Ouzilly...
*** Your editors are hosting a conference on... would you
believe it... writing for the Internet! So, Daily Reckoning
readers get a break today; we have not had time to do as
much reckoning as usual.
*** But here's an interesting item from a recent Barron's.
Remember how you should Buy Low/Sell High? Well, we don't
know exactly what is low enough on Wall Street to make us
want to buy, but when Bridgewater Associates looked at 20
of the leading Internet companies, they found a group high
enough to make us want to sell. Ebay, Amazon, Yahoo,
Priceline and the rest of the group are now valued by the
market at $122 billion. But taken together, they have
earnings of only $25 million. That gives them a collective
P/E of 4,878.
"I made a lot of money selling those companies short a
couple of years ago," Porter Stansberry told me yesterday.
"Guess I'll get another shot at it."
*** And poor Alan Greenspan. He should have quit when he
was ahead."Something has gone very wrong with the
maestro," writes Paul Krugman in the NY Times.
What went wrong was that the economy failed to cooperate
with his first 12 rate cuts. And when the 13th came along,
it actually seemed recalcitrant, even surly. Instead of
going down, which would have set in motion another round of
refinancings, mortgage rates went up. Last week, they were
at their highest level since January. How can you keep the
illusion of prosperity if you can't lure people into
greater debt with lower mortgage rates? How can you keep
the world's mouth fed without more credit? We will see,
dear reader, we will see.
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The Daily Reckoning PRESENTS: As the wells of natural gas --
the ever-more important alternative to crude oil -- begin to
run dry in the U.S., says John Myers,"more and more eyes
are turning towards the reserves hidden in Canada." Natural
resource investors, take note...
GASBACKWARDS
By John Myers
"We're out of gas!" says Chairman Greenspan. Natural gas,
that is. Earlier this month, Greenspan appeared before a
Senate committee, as he often does. But on this particular
visit, the maestro of monetary policy did not discuss the
stalled economy or the record low interest rates that his
Fed has engineered. Instead, he talked about the nation's
looming natural gas shortage. And for once, he's right.
"Today's tight natural gas markets have been a long time in
coming," Greenspan observed,"and distant futures prices
suggest that we are not apt to return to earlier periods of
relative abundance and low prices anytime soon."
In his testimony, Greenspan pointed out that the market -
the best of our admittedly imperfect future predictors - is
indicating high and rising methane prices throughout the
decade."The long-term equilibrium price for natural gas in
the United States has risen persistently during the past
six years from approximately $2 per million Btu to more
than $4.50. Although futures markets project a near-term
modest price decline from current highly elevated levels,
contracts written for delivery in 2009 are more than double
the levels that had been contemplated when much of our
existing gas-using capital stock was put in place."
Because the United States imports 53% of its crude oil
(compared to 35% during the oil embargo of 1973), the
country relies increasingly on natural gas to supply its
energy needs.
According to the July 21st edition of Time:"Crude oil is
winding down. The last nuclear power plant was ordered in
July 1973. No meaningful alternative fuels exist. In short,
Americans are heading toward their first major energy
crunch since the 1970s." Therefore, natural gas will play
an increasingly important role in satisfying U.S. energy
needs.
But it hasn't always been this way. In 1962, methane gas
was considered a nuisance, not a collectable resource. Back
then, gas was the ugly stepchild of the petroleum family -
a safety hazard with no market value. Drillers cursed when
they found it. In North America, gas sold for 30ยข per
thousand cubic feet as recently as 1974.
But as the demand for energy surged in North America, the
U.S. began to discover fewer and fewer rich oil wells.
Meanwhile, companies began to consider the applications for
natural gas. In short order, excess methane gas was not
only being captured, but companies began to drill for it,
routing production directly from the well into pipelines.
Today, natural gas is delivered to about 175 million
American consumers through a 1.3 million-mile network of
underground pipe. There are nearly half a million wells in
North America producing natural gas.
One of the most valuable advantages of natural gas is that
its supply cannot be disrupted by wars or embargoes. While
the United States imports half of its oil supplies, a
whopping 88 percent of the natural gas it consumes is
produced domestically, while the remaining balance is
imported from Canada via pipeline.
Unfortunately, many of the natural gas wells in the United
States are beginning to run dry. A few years ago the Oil &
Gas Journal published a wake-up article, detailing how
Texas - which produces one-third of the nation's gas - must
drill 6,400 new wells each year to keep its production from
plummeting. That's a rate of 17 new wells every day. By
comparison, a few years before, Texas was drilling just
4,000 wells to keep production steady.
This drastic falloff in production has occurred as drillers
must drill smaller pools, which deplete much more quickly
than their larger cousins. Today, new pools in Texas have
become so small that after just one year of production,
more than half the pool has been depleted. As U.S. domestic
production continues to taper, more and more eyes are
turning towards the reserves hidden in Canada.
According to the Oil & Gas Journal, the influx of Canadian
natural gas into U.S. markets will steadily rise over the
next several years. The WSOB, one of Canada's most
attractive oil and gas basins, has over 200 Tcf of gas
reserves - making it the largest basin in North America. It
is still relatively immature, with a much lower well
density than the over-drilled basins in the lower 48
states. In fact, only 25 percent of estimated reserves have
been exploited in Canada, compared with 45 percent in the
continental United States. This sets up windfall potential
for Canadian petroleum companies and the shareholders who
develop them.
Even conservative investors can't help but salivate at the
rampant growth of Canada's natural gas markets. In 2000, a
total of 5,500 gas wells were drilled in the WSOB. In 2001,
7,700 wells were drilled. Even with all this activity,
geologists estimate that two-thirds of the WSOB's gas
reserves have yet to be unlocked.
The expectation is that more and more Canadian methane will
be used to quench America's abundant thirst for energy.
Speaking at a natural gas conference on June 26th,
Secretary of Energy Spencer Abraham suggested Congress
should"help spur domestic production of natural gas and
enhance our importation facilities to boost supplies, while
reducing our nation's growing over-reliance on this one
source of energy."
Also speaking at the conference, Cambridge Energy Research
Associates Chairman Daniel Yergin said a hot summer could
trigger higher gas prices."Every recession since the early
1970s has been associated with spikes in energy prices,"
Yergin said."The problem now isn't market failure, but
disappointing drilling results, restrictions on exploration
and a shift to new uses of natural gas that will certainly
raise consumption," he said.
The natural gas market is just beginning to heat up... and
as anyone who has worked around methane knows, heat can
cause an explosive situation.
Yours for energy profits,
John Myers
for the Daily Reckoning
Editor's note: John Myers - son of the great goldbug C.V.
Myers - has been helping readers earn surprisingly
lucrative returns in stocks largely unknown to Wall
Street's wunderkinder since his early 20s. Our man on the
scene in Calgary, John has his fingers on the pulse of
natural resource profits - including oil, gas, energy and
gold. For more details on John's analysis of the post-war
state of energy - as well as a clue to his recommendations
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