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David Fuller and Eoin Treacy's Subscriber's Comment of the Day.
Wednesday 15th February 2012
Factories Churning Out More Products Help Kindle U.S. Expansion: Economy - Here is the opening for this encouraging report from Bloomberg today: Factories in the U.S. boosted production in January, capping the biggest back-to-back increases in more than two years, showing manufacturing will remain at the forefront of the expansion.
We are long-term stock bulls and Treasury bond bears because of valuations. We believe that stock valuations are cheap and Treasury valuations are expensive because the global economic outlook is uncertain. Greece exemplifies this uncertainty, but we believe good news in the US - a manufacturing giant - trumps bad news in a small economy such as Greece. US manufacturing is delivering exciting news. The following excerpt from a report by ISI Group, one of our research providers, reinforces a point that we have been making: US manufacturing is experiencing a revival that is gaining momentum. Furthermore, ISI observes that last week marked the 19th week of stronger US economic data. We think this far outweighs Greece's problems in its long-term impact on our stock portfolio. The US economy is recovering despite the problems in Europe. My view - Evidence of a revival in US manufacturing is certainly a more important story for the global economy than Greece's implosion, although the latter event still retains the capacity, albeit diminished by familiarity, to have a negative effect on investor sentiment. To the extent that US manufacturing employment is now increasing, I see four main contributing factors: 1) the economy is still on steroids in the form of QE; 2) inventories had fallen to very low levels and need to be replenished as the economy has avoided recession; 3) US labour is less uncompetitive now that unions have moderated demands and wages have steadily increased in China; 4) as the US moves closer to energy independence, thanks to shale gas and oil deposits, chemical companies and other manufacturers can assume that energy costs will be lower and also more stable than in most other manufacturing countries.
My view - Everything that I have read about graphene continues to suggest that it will eventually become the most important manmade industrial material of all. It is certainly another reason to be very excited about the exponential growth in technology, at a time when most investors are still preoccupied with Greece and all the other debt problems in the west. These are formidable obstacles but they will eventually be overcome, as we have seen with earlier credit crises. Meanwhile, our technology-led future is full of potential. There are four earlier items on graphene in the Archive which can be found by using the Search facility in the menu shown upper-left, fourth item down.
"I would like to make the 50th Forum special, featuring speakers from past conferences that were particularly well-received…in other words, not too many new folks as speakers, but rather a grateful nod to those who have made the Forum such a unique conference." This will be my 4th Forum and Mrs Fuller and I certainly look forward to it, not least because of the many opportunities to chat with subscribers. A record number of you attended last year, including a charming family of 12! Save the dates above if you would like a stimulating holiday in beautiful Vermont.
My view - Cameco (weekly & daily) has speculative recovery potential given a generally bullish environment for equities. However, the long-term potential for uranium miners has been damaged by Fukushima, the emphasis on renewables, and especially the vast quantities of shale gas and oil which will be developed. I have some Cameco in my personal long-term investment account and am likely to sell it on further strength. China Pledges to Invest in Europe's Bailout Funds, Hold Euros – This article from Bloomberg News may be of interest to subscribers. Here Is a section: Zhou's comments came a day after Premier Wen Jiabao said the nation is willing to get “more deeply” involved in resolving Europe's debt crisis, although the continent must send a clearer message to show how it's working to strengthen its finances. “China's willingness to support Europe to cope with sovereign debt problems is sincere and firm,” Wen said at a joint press conference yesterday in Beijing with European Union President Herman Van Rompuy. “China is ready to get more deeply involved in participating in solving the European debt issue.” Van Rompuy said he welcomed the interest China has shown in investing in European sovereign bonds and the region's rescue fund. Meantime, back in Europe finance ministers are slated today for a teleconference call to prod Greece to do more to qualify for another bailout. “We expect those highly indebted countries to strengthen fiscal consolidation, cut deficits and reduce debt risks in light of their national conditions,” Wen said. “We hope the EU will soon reach internal consensus, make the political decision and send to the international community a clearer and a stronger message of policy responses.” My view – European creditor nations have been slow to sign off on the next €130 billion loan to Greece because they are worried about Greek commitments to implement the agreed reforms. With an election so soon after the next major repayment date, this issue is unlikely to evaporate regardless of commitments by the Greek opposition that they will stand firm to austerity goals. To mitigate their exposure to peripheral bailouts, core Eurozone countries have been shopping for external investors to help shoulder the burden. China has been slow to act but that attitude appears to be softening and this can be viewed as a positive development.
What's going on with gasoline demand given the general conclusion from the latest economic data that the U.S. economy is recovering? According to the MasterCard Advisors' Spending Pulse survey during the week ending February 3rd, gasoline demand in the U.S. fell another 2.8% to 8.269 million barrels per day, which marks a 5.3% decline from a year ago. If you focus on the four-week moving average of demand, it fell year-over-year for the 46th consecutive time. For that period, demand was 4.9% lower than a year ago. The easiest explanation for lower gasoline demand is that people are driving less because of the recession and high pump prices, and when they have to drive they are using more fuel-efficient vehicles. The data for vehicle miles driven support those points. The big question, however, is whether the weak demand is due primarily to the weak economy and continued high unemployment, or whether there might be other factors at work. We believe this topic merits greater analysis and we will be revisiting it, but in the interim one has to conclude that there may be structural shifts underway in the vehicle fuels market. While economic conditions have to be one cause, changes in consumer spending and entertainment habits are other forces that could be negatively impacting miles driven. A comment in a letter to the editor of The Economist on British retailing highlighted these cultural changes. The writer wrote, “And if I need to buy books I'll click on Amazon, where parking availability is not an issue.” Cultural habit changes are obvious factors, but preliminary data also shows the possible end to the growth in American licensed drivers. Could this be a stealth factor? There is plenty of data to study, but we suspect it will substantiate a permanent decline in the U.S. gasoline market. If correct, there are negative implications for fuel tax receipts, highway spending and new car sales – all of which will limit economic growth. My view – It may take time to become apparent but high energy prices cause consumption habits to change. When energy prices are low, the cost of commuting, road trips, air fare, school runs and shopping expeditions tend to be inconsequential factors in planning. However, as prices rise, the impact on personal finances becomes ever more apparent; necessitating behavioural adaption. The correlation between the penchant for “green” energy and high prices over the last decade mirrors a similar drive during the oil crises of the 1970s. At the same time, high prices act as an incentive to produce more where possible. Since OPEC is a considerable inhibitor to supply increases, oil companies have to either increase production from existing wells through technological advances or discover new resources outside the control of national oil companies. US unconventional oil and gas reserves are increasingly being exploited through innovative technological enhancements. Over the medium to long term this should put downward pressure on US energy prices. As these two trends converge, the prospect of US energy independence is becoming a realistic possibility over the next decade. However in the short-term, risks are to the upside for energy contracts as they attract speculative interest, not least because increases in money supply spur investors to seek assets likely to hold their value. The US Daily National Average Gasoline Price tested the $4 area in April and trended steadily lower until December. It has since rallied to break the progression of lower rally highs, and a sustained move below $3.40 would be required to question scope for some additional upside. West Texas Intermediate has been ranging in the region of $100 since mid-November. It firmed within the range this week and a clear downward dynamic will be required to question current scope for additional upside. Heating Oil has been ranging around $3 since April and has exhibited a rounding or saucering characteristic over the last few months. It is currently testing the upper side of the congestion area and a sustained move below $3 will be required to check current scope for additional upside.
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