One morning, someone came up to me and asked if I thought that the market would rebound or continue dropping over the next month. As an investment professional, I felt compelled to answer the question however I knew there was no way I was certain and could give a fair answer to her....so I stole a quote from the Great JP Morgan when he was asked the same question more than 90 years ago.....I am sure that...."It will fluctuate."
Of course, I am sure she wanted to kill me for giving her such a condescending answer but she could help but break out into a laugh and called me an ass...What a way to start a day.
Musicwhiz left a comment on my last post and I just want to say, I totally agree with you on your comment. I really felt the company has so much value after the integration and this would be the year when results start to show. Well that is life isn't it. Look on the bright side, at least KS Energy shareholders did not suffer the same fate as Sino-Forest shareholders.
In my previous post, it was said that we were going to have a very tough week because history and the current technical chart clashes. What we had was a roller coaster trip and the tug of war between the bulls and bears. It ended with the market ending negative for the week. Why did we have such a tough week?
1) The FOMC revised down down their growth forecasts for 2011 and 2012. The projected growth for this year’s GDP was lowered to a range of 2.7% to 2.9%, down from the April forecast of 3.1% to 3.3%. GDP outlook for 2012 also was revised significantly lower to 3.7% at the high end of the range from a high of 4.2%.
2) US unemployment was revised up to a range of 8.6% to 8.9% this year from 8.4% to 8.7%.
3) Headline inflation for 2011 was placed in a range of 2.3% and 2.5%, compared to 2.1% to 2.8% in its April projections, and for 2011 to 1.5% to 2.0% from 1.2% to 2.0%. In both years the lower end of the range has been increased, decreasing the chance of prices stalling out. Core PCE too saw an increase, with prices expected to climb 1.5% to 1.8% in 2011, compared to 1.3% to 1.6%.
The higher inflation forecasts seem to have made an important difference to the Fed, which now does not see quantitative easing as a proper solution. We’ll see how long that lasts if the economy continues to disappoint, but it will take several months of persistently worse employment data for the Fed to act with looser policy.
The funniest part was during the press conference with Bernanke, he said something that gave the world jitters.
From Marketwatch: “We don’t have a precise read on why this slower pace of growth is persisting,” Bernanke told a press conference after the Federal Open Market Committee meeting where the central bank said it would end a $600 billion bond purchase program as planned in eight days and kept interest rates at historic lows.
Bernanke said that “some part” of the slowdown was due to temporary factor such as higher food and gasoline prices and disruptions to manufacturing because of lack of key parts from earthquake ravaged Japan.
But the Fed chairman said it was possible that some of the slowdown might be to longer-lived issues that could persist into 2012. He cited weakness in the financial sector, the housing market and consumer balance sheets as three headwinds.
“We have an awful lot of uncertainty right now about how much of the slowdown is temporary, how much is permanent; so that would suggest, all else equal, that little bit of time to see what’s gong to happen is — would be useful in making policy decisions,”
I love the fact that he said he is unsure which part of the slowdown is due to permanent structural changes....The Fed Chief saying he is not too sure. Now he wants to wait and see before deciding on future policy options. I tell you what that means. Right now is not the time to do QE3 because inflation is on the uptick and if he even suggests QE3 now, he will get slaughtered. What he did was to indicate that the growth in 2012 will continue to be tepid due to some permanent structural issues. That leaves the door open for more stimulative measures next year or the end of the year should inflation start to taper off.
How will inflation taper off? This is just conspiracy theory on my part but this is one of the moves....
**** Oil consumer nations announced the release of 60 million barrels of oil from strategic government reserves Thursday. The motive behind the move was to cause a drop in oil prices and buttress the global economy. The International Energy Agency (IEA) plans on releasing 2 million barrels a day over a 30 day period to make up for the lack in Libya's production. The United States will provide the bulk of the supply (approximately 50%) from its vast crude reserves, with Europe supplying 30% in crude and refined products and the remainder to be supplied by Pacific OECD nations. The declaration could be construed as a direct reaction to the Organization of the Petroleum Exporting Countries (OPEC) failure to raise production in a meeting on June 8. (Read about it here) Moreover, guarantees from OPEC's principal producer Saudi Arabia that it would fulfill any request for production fell on deaf ears. Prior to the OPEC gathering Riyadh talked over an exchange with the US where US crude would be supplied to Europe, no arrangement was attained.
Libya, an OPEC member, exported approximately 1.2 million barrels per day prior to the ongoing upheaval that brought Libyan oil production to its knees. The IEA stated
"This supply disruption has been under way for some time and its effect has become more pronounced as it has continued. Libya is likely to remain off the market for the rest of 2011.”
the IEA who went on to say
"Greater tightness in the oil market threatens to undermine the fragile global economic recovery."
The IEA was formed in 1974 in reaction to the Arab oil embargo. This is the third emergency release in the 37-year history of the organization. Oil prices traded down $6.17 a barrel regarding benchmark Brent crude, which dropped to just over $108 a barrel. US crude tumbled over four dollars a barrel to approximately $91 a barrel.
This move puzzled the whole world including me. Inventory levels are at highs and supply of oil is supposed to be plentiful at this time. There was absolutely no sign or even worries about oil supply issue globally. Look at the Nymex WTI crude. The gap between WTI and Brent is already close to US$20 and this reflects the worries over the supply disruption in the Middle-East thus the premium on Brent crude. But why would the US need to have more supply at this time? There are a few arguments for this move, either the the supply situation is dire contrary to all the reports of plentiful supply over the past few months or the US wants to lower expectations of oil prices in order to lower sentiment for the commodity complex.
Unfortunately this IEA effort is just a drop in the bucket and will have a nominal short term effect on oil prices. The drop in prices today should be seen as a buying opportunity for the non-OPEC integrated players who will benefit from rising prices once the dust settles and everyone realizes the theory of peak oil may soon be proven true.
My bet is, this move is going to fail and energy prices will remain well supported going forward. Knowing Bernanke, he is frustrated not because he is uncertain about which part of the current weakness in growth is due to permanent factors and which is due to temporary ones. He is frustrated because he feels his hands are tied by the growing inflationary pressure in his core CPI numbers. Given his strong conviction behind how monetary policy and exploitation of the fiat money can bring the US economy out of the sh*% hole, he must be having sleepless nights over not getting free reign to keep the printing presses working.
Well lets see if I am right in 6 months.
Best,
SVI
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