A Reversal: US Oil Production is Now Up!

Surprised?  I was,  . . .  but its true!   In decline since 1970, the American Petroleum Institute reported US oil production has now turned up, with October production of 5.36 million barrels per day, the most since 2005. See the article here. Even Exxon (XOM) is "coming home" with its proposed acquisition of XTO Energy -- XTO has a large position in North Dakota Bakken Shale acerage.

The Cheyenne River Indian Reservation  in western South Dakota is wild, desolate . . . and beautiful!  Three million acres of rolling prairies and buffalo, just as trappers and the first settlers saw it.  Much of the surface soil here is shale, Pierre Shale.  In the 1970's I found 80 million year old ammonites exposed, right on the ground.  The high clay content makes the soil poor for agriculture (probably why it was given to the Sioux Indians as a reservation in 1889).  Due to surface exposure, the original oil and gas components here are long gone, but not so for the deeper shale and sandstones deposits to the north, where a bonanza in oil and gas has been found.

Further north (meaning North Dakota, Montana, Saskatchewan) oil production is skyrocketing.  North Dakota may be sitting on one of the largest pools of oil in North America.  Bakken Shale oil production alone may reach 500,000 barrels per day in 2011, up 50% from two years ago.   And now, beneath the Bakken a new, apparently just as prolific, oil formation, called the Three Forks, is being explored.  The Three Forks is rumored to contain just as much oil as the Bakken.  Also, newly exploited to the northwest, in Canada, the Cardium formation is showing an abundance of oil.  SA author Keith Schaefer has written extensively on the Cardium.

Multi-stage fracturing, or fracing, of horizontal wells in tight shale formations is providing an unexpected abundance of gas and oil.  This new and rapidly evolving technology involves insertion of various liquids or gases (water, carbon dioxide, nitrogen, air etc.) along with proppants into horizontal bore holes in "tight" rock formations such as shale.  The liquids or gases create fractures in the shale and proppants (sand, ceramics, etc.) keep the fractures open.  Oil and gas then flow into the fractures and can be harvested.  For more information on the technology  read here.

Mid-Continent shale may have as much as 500 billion barrels of oil (admittedly a wildly optimistic estimate but if so think Saudi Arabia).  While it is true that much of this oil may not ever be recoverable, increasing prices and the aforementioned technology is rapidly improving the odds.

And, don't forget the Gulf of Mexico.  Although drilled heavily, companies are also producing more oil from the Gulf. Major projects are now coming on line while old fields, due to technological advances, are producing more than expected. New discoveries keep coming, read about BP's recent "giant" find here.  At the same time, smaller companies such ATP Oil and an Gas (ATPG) are prospering by extracting more oil than ever thought possible from old fields.  Technology is truly evolving and allowing us to find and produce ever more oil and gas.

So,  is all the "gloom and doom" of Peak Oil talk just that -- only talk?  Well, not so fast, the US increase is minuscule when compared to worldwide daily demand of approximately 85 million barrels of oil.  Oil demand, while stagnating in developed countries, is jumping fast in developing countries.  Car sales are exploding upward in India and China as road infrastructure is built out.  The "American Dream"  of car ownership is now becoming the Chinese or Indian dream.  With Asian populations many times that of the US the potential is enormous.

A few years ago severe shortages of natural gas were predicted in the US and several LNG port projects were started in anticipation of imports.  Now, construction has slowed or halted, and the facilities are languishing -- mostly due to US shale gas production.  It seems unlikely the same could happen with oil any time soon, but keep your eye on US domestic production.

Below are some US companies with significant stakes in Mid-Continent (read North Dakota) shale oil plays: 

Continental Resources  (CLR), at $6.7 billion market cap and 605,000 net acres is in both the Mid-Continent and Gulf Coast regions.  82% of the shares are held by insiders, with Harold Hamm, CEO, holding most of it.  Continental under Hamm, excited by the potential, has recently made a major move into the Bakken in North Dakota,

EOG Resources  (EOG), at $23 billion market cap and 513,000 net acres is in the Mid-Continent and Gulf Coast regions.  EOG, an international company, is probably the least speculative way to invest in the Bakken.

Whitting Petroleum  (WLL), at $3.4 billion market cap and 89,000 net acres is in the Mid-Continent Whiting is also in the Permian Basin, the Rocky Mountains, Gulf coast and Michigan.  Whiting is exploring the Three Forks formation under the Bakken.

Below are some Canadian companies that have significant western shale oil stakes.

Crescent Point Energy  (CPGCF.PK) is active in the Canadian Bakken and "believes it has a drilling inventory of 3000 wells to drill."

PetroBakken  (PBKEF.PK) recently combined with TriStar Oil and Gas and supposedly has an inventory of 1,300 Canadian Bakken wells.

Also, many of the Canadian Royalty Trusts have significant land holdings in Canadian shale areas.  An added bonus: they often offer attractive dividends.

A cautionary note:  I am not recommending any of the above equities.  Everyone's situation is different so use your own due diligence and investigation before investing.  It is true that there is a lot oil in North American "tight" shale, and technology is improving the cost of getting it out.  However, a sharp drop in world oil prices could make the shale oil, which is still fairly expensive to pump, uneconomical and many shale oil companies may be adversely affected.

Disclosure: Long BP and PBKEF.PK

Not Telling Jennifer . . .

"I'm not telling Jennifer" he said.  This from the man selling wooden chopping blocks last summer at a Michigan craft festival.  He was responding to my query concerning sales tax.

Not tell Jennifer? . . . Who is Jennifer? . . .   His wife? . . . Co-worker? . . . Why would she care?

Then I got it.  Jennifer Granholm is the governor of Michigan.  Conditions in Michigan are really bad right now and may be looking worse for the future.  The state,  businesses, residents . . .  everyone is scrambling!  Unemployment is 14.3%, up from 8.7% a year ago.

A recent, and rather frightening article, predicts that Michigan's General and School Aid funds will need to be cut almost 50% by 2017 (see here) if the budget is to be balanced   More and more residents are rebelling, clamoring that state employees and social welfare recipients also need to start sharing the pain.  Its a mess.

In a way ,the state brings on its own problems.  We collect sales tax on summer rentals in Michigan.  What I found quite astounding was how difficult it was to set up forwarding the payments on to the state.  You need to fill out forms and jump through a lot of hoops -- and thats to send money to them!

The state doesn't seem to have a provision for individuals to pay sales or use tax, even if they owe it.  The forms are all company oriented, and there is less and less traditional employment in Michigan.  After unproductive phone calls and emails I finally gave up and just put my last name in the "Company Name" field.  Not sure if it was correct, but they are accepting and cashing the checks.

Untaxed, unregulated, unlicensed, unreported . . . America's underground economy keeps growing.  The Christain Science Monitor recently estimated the shadow economy to be as big as $1 trillion or 8% of GDP  (see here).  Every uptick in unemployment, every tax increase, and every new regulation drives the figures up.

If you are unemployed and ambitious you do what it takes to get by.  Telling Jennifer is all too often just not a priority. 

Bargains at McDonald's

This morning, on a whim, I stopped for an early lunch at McDonalds (MCD).  I ordered two regular hamburgers and an iced coffee -- hazelnut, my favorite.   The charge? $3.17!  I looked at the receipt.  I was charged $.99 for the two  hamburgers and $1.99 for the coffee.

I started thinking about that.  Why would McDonald's only charge me $.49 for a hamburger?  That is about the same price I paid in St. Louis over 25 years ago.

The iced coffee I could understand.  You can get Starbucks type beverages for less -- a good way to get "prestige" on the cheap.  Of course the atmosphere isn't quite the same.

But, that $.49  hamburger?  After studying the posted prices over the counter I finally found, in small print near the bottom,  the regular hamburger price. It was marked $.69!  Well, that only deepened the mystery.  Why would they only charge me $.49?  Some kind of senior discount maybe?  I'm 60.  The sales clerk did not ask my age and I could find no promotion advertising a hamburgers or senior specials.

Times are tough,  If people can get 2 hamburgers for $.99 and skip the drink this would be a great way of getting meals on the cheap.  I'm not sure this stuff is good for you but it is cheap!

For what its worth: at the next table two teenage girls were splitting what looked like a large order of fries and a medium drink.  Apparently McDonalds is doing well with this type of stuff.

ETFs for Bear Markets

The dollar keeps falling while "real" assets such as gold, oil, and equities continue to march ever upward.  Its great to go along for the ride but keep in mind that "all good things must come to an end someday".  Sometimes a violent end! When the tide turns ... and you know it will ... how can you position yourself?

Just about anyone with an elementary school education can make money when equities, commodities and bonds all go up at the same time.  However, investments that do well when things go the other way are much harder to find.  Here are some ideas on how to hold your own, if not profit.

First, get into a healthy cash position, then consider these ETFs.  Most did well or at least held their own in the 2008 bear market.  Two are currency ETFs.  Currency markets are much larger and independent of equity markets.

1. UUP  Yes, the much maligned US dollar.  Just how low can it go?  Well, don't answer that question, but do consider that UUP was probably the best performing ETF in the second half of 2008.
2. CYB  The Chinese yuan.  This is an interesting play.  Currently the yuan is pegged to the US dollar but any change will most likely have the yuan appreciating versus the dollar.  Note that the yuan mostly held its own during the second half of 2008.  China is also printing money but doesn't have the deficit problems the US does.
3. TIP and BND  TIP invests in inflation protected US bonds and did not do well the second half of 2008.   However, if you see a stagflation scenario ahead TIP may be a good place to be. BND tracks a "broad, market weighed index" of bonds and except for a violent but brief spike down in September, when everyone was panicking, held its own throughout 2008.
4. DOG, SH, PSQ and RWM.  These inverse ETFs are a convenient way for investors to "short" the market and a great place to be in falling markets.  But, remember these ETFs are subject to tracking error and values decay over periods of time.  Also, see the comment about "bear" ETFs below.
5. GLD  Gold is commonly thought of as an inflation hedge.  Yet, more than anything, it is a store of value in uncertain times.  If you see greater than normal financial and social unrest ahead -- and most of us do -- you may want some gold investments.

If you are a day trader you can see a list of Yahoo Finance's "bear" ETFs here. Remember, most if not all, of these are for day traders only because of daily rebalancing.  Held long term, they not only can, but will, destroy your portfolio.  Click the "Return (Mkt)" tab on the Yahoo site to view the "Red Sea" of three year returns, losses run up to 70, 80, even 90 percent.  Only one, UDN, shows a positive three year return -- wonder why?

So, when will the equity-commodity-bond market run end?  Consider these potential early warning signs:  long term treasury rates start rising, the Fed is really ending Quantitative Easing, and an improving US economy which may cause the US Federal Reserve to raise rates.  For now the "herd" is jumping on the band wagon -- and more are boarding every day --  so enjoy the party.  But, be ready to jump when the music gets out of tune and the wagon starts swaying.

Disclosure:  I have a small "precautionary" position in SH

SunTrust, Signs of a Solid Investment?

The heat and humidity in central Florida was unbearable a few weeks ago -- summer refused to leave.  A dome of sauna-like high pressure blanketed the state.

The air conditioned lobby of the local SunTrust (STI) branch was a welcome relief.

First thing: You notice the signs, signs everywhere, in the lobby, in the hall, behind the tellers.  More signs than customers, all touting SunTrust's "SOLID" message.  I considered whipping out my camera to snap a picture or two for this post but ... thoughts of being spread-eagled and searched in some administrator's office quickly put that idea to rest.  You can, however, see examples of SunTrust's SOLID message yourself on SunTrust's  web site here.

Mid-December of last year -- in the middle of the crash -- I posted a SA article on how business, at least from a customer's perspective, appeared normal at SunTrust.  See the earlier article here.   SunTrust's stock then was in the upper 20's and dropping -- it was destined to hit a low of 6 in March of 2009.  Now, on October 26 it is just below 20.

The bank recently posted it's 4th straight quarterly loss, revenue is down 21%, non-performing loans up 65% and charge offs up 26% (see here).

From a customer's perspective the changes are more subtle.  Well, there are the signs, "SOLID" is everywhere.  Some signs, such as "SOLID ADDS MORE OOMPH" -- I'm not sure what the meaning is.

Gone are the Home Equity Loan promotional signs.  Indeed, SunTrust froze my own HEL account several months ago.  I did see a small sign on a desk touting auto loans.

I was struck by the quiet and lack of customers, maybe it was the late Tuesday morning time frame. Only two of the seven lobby offices and one one of the five lobby desks had staff.  Six months ago there were Saturday hours, now gone.

During past visits I noted stacks of loan applications on lobby desks.  Now, the desk I sat in front of had only some kind of subpoena -- quickly whisked out of sight.  Even the pens looked like they came from Wal-Mart.

I like SunTrust -- even if they did freeze my HEL account. Staff are mostly friendly and helpful, the lobbies well air conditioned (important in Florida), and branches are convenient.  The website layout is easy to follow and I like the logo (see picture above).

Residential, and commercial real estate values are down close to 50% from 2006  in the northerly suburbs of Tampa.   Considering the 100% loans originated in those boom years all kinds of stuff is now "underwater".  This must be a huge problem for SunTrust and other area banks.  Foreclosures are skyrocketing.

Nearby is a new 16 unit strip mall, quite attractive, completed well over a year ago.  So far it boasts only one tenant, a doughnut shop.  Someone has to be losing a lot of money here. Don't know if it's SunTrust financed, you don't see the "Financed By" signs around anymore.

With ZIRP financial institutions can purchase longer term treasuries and profit from the spread.  This may explain the market for10 year US Treasury Bonds, paying 3.5% despite years of trillion dollar deficits staring us in the face.  Thank you taxpayers, just don't expect to get it back on your savings accounts.

The biggest beneficiaries of tax-payer bailouts pay the least interest on savings.  Back of America (BAC) pays .1% a year, Wells Fargo (WFC) .05%, Chase (JPM) .01%.  See here.  Hmm ... let's see now.  $5,000 in a Chase saving's account (or Washington Mutual, which is now JP Morgan Chase) would earn $5 for the year.  Las Vegas, here we come!

And Suntrust?  Well, SunTrust paid me 1 cent (rounded up?) interest last month on my $162 savings account.  At this rate I will report a grand total of 12 cents in interest income on 2009 taxes!  Sure hope the IRS isn't expending too much time and effort pursuing interest income cheats this year!

Yet Bernanke has to keep rates low.  To increase short term rates would devastate the profit spreads, crashing housing, equity and bond markets yet again.   We would be right back to last fall.  Question is: how long will US savers put up with these abysmal rates?  Recent market jitters are unnerving.

So is SunTrust a "SOLID" investment?  Despite the signs, I would have to say no.  Not picking on SunTrust, same goes for other banks.  Considering the craziness and shenanigans going on with interest rates and the Fed's MBS purchases (which could end) I would avoid investing in any US financial institutions at this point.

Reality is not far from the air conditioned lobby.  A few blocks away, a well dressed, unhappy looking middle aged woman is sitting on the sidewalk, clutching a large flooring special sign, attempting to fend off the mid-day sun.  These people are hired to jump around, wave at passing motorists, entice them to buy.  Sitting down on the job?  Well, you try jumping around and waving all day in Florida's heat and humidity.  But, hey -- she has a job.

Disclosure:  I have no positions in the stocks mentioned above unless you count my SunTrust accounts.

Why the Big Market Run Up?

Since March lows stocks have rocketed up 50% or more and the trend shows no sign of abating.  Back in March there was almost universal pessimism.  So what has changed?

Have fundamentals really improved?  Unemployment is still going up.  Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money".  I guess California at least gave it a try with those infamous "IOU"s.  How green will the shoots stay if government money slows or stops?

In my opinion this is a tax payer fueled rally.  A massive infusion of newly printed money (backed by US taxpayers) is flooding the system.  The major recipients of this largess, the banks, get this money loaned to them at 0%.   They then do what all good bankers do,  reinvest the money at higher interest rates and profit from the spread.  With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.

The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value.  Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved.  Question is:  Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans?  If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade.  Let's hope they don't start leveraging.

Unfortunately, US taxpayers will pay a terrible price.  Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?).  The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do.  He doesn't dare raise rates, he may have no choice about leaving short term rates low.  I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued.  You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe.  Maybe policitcally they had no choice.

Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward.  Even real estate is showing signs of bottoming.

Devaluing the dollar will cost all Americans dearly.   It will increases the price of just about everything and sets the stage for hyperinflation.  Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40.  Health care?  Well, we don't even want to go there.  Savings and fixed income instruments would be devastated.

We have always had to deal with inflation to some extent.  The problem now is it threatens to spin out of control.  Hitting that magic window of 1-3% inflation may no longer be possible.  People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.

A Timber-Backed ETF for an Historic Commodity

Up until 100 years ago our ancestors needed timber almost as much as water to survive.  Keeping warm, building shelter, constructing tools, all called for timber.  It was necessary for survival and life itself.  Indeed, plant material was (and still is) the basis of all life.

You can invest in timber by buying wooded acreage.  Periodically (like every 10-15 years) a timber company will pay to harvest your trees.  A much simpler and more efficient way though, would be to buy CUT, Claymore Securities' timber ETF  According to Claymore, CUT seeks investment results that track the Beacon Global Timber Index (see here for index information).

CUT invests at least 90% of its money in worldwide holdings of timber and wood product companies.  As of September 28, 2009, no company constituted over 5% of holdings, so your are well diversified.  Included are some well know companies such as Meadwestvaco (MWV), Rayonier (RYN) and Weyerhouser (WY).  A little under 1/2 of all holdings are in US (27%) or Japanese (19%) companies.

In the 1800's indiscriminate lumbering of pine (White Pine image at left) reduced much of America's, especially Michigan's, virgin pine to a wasteland of stumps and dry brush. This in turn sparked rampaging wildfires, both in the cities (Chicago fire of 1871) and cut over lands, the effects of which can still be seen.

Today, timber is harvested for packaging, paper, building materials, heating and furniture construction.  Home construction and furniture making are cyclical industries while packaging is highly dependent on the economy.  Many of CUT's holdings are packaging companies.

Is CUT a good buy?  You can make an argument either way.  On one hand timber is a real, not paper (I know, I know ... bad choice of words), asset which will always be in demand.  If nothing else you can always burn it for heat.  Indeed wood heat is becoming preferred in rural areas as a replacement for expensive propane.

On the other hand, packaging demand, dependent on recession spooked consumer spending, is in a slump.  Since CUT has almost tripled off its 52 week lows one must question the near term prospects, especially in a deflationary environment.  CUT, going forward, will undoubtedly mirror the health of the worldwide economy.

You can find more about CUT at this page on Claymore's website.

Disclosure: No Holdings in any of the above.