Eye of the Energy Storm

March 12, 2013

• The precarious balance of North American oil production: Byron King on “the eye of the energy storm”
• “Subtle signs of life” in gold stocks: Guenthner on what to look for before you buy
• And it fights acne too: Patrick Cox on the latest use of a breakthrough supplement
• If you can’t expatriate, there’s “the Puerto Rico option” — which one hedgie is exploring
• Asset-backed securities in which the “assets are subprime auto loans… a Bitcoin hedge fund… new opinions in the “keep the politics out” debate… and more!

  The price of oil jumped nearly $1.50 this morning. At last check, a barrel of West Texas Intermediate fetches $93.14. The dip below $90 earlier this month took, what, a few nanoseconds?

Overseas, a barrel of Brent — a much better barometer for what most of the world pays — goes for $110.24.

  “Doubtless you’ve heard” says our Byron King, “U.S. oil output is increasing. And U.S. oil imports are declining.” We don’t need as much crude from the likes of Saudi Arabia and Nigeria as we used to.”

So what do those countries do? “It’s easy enough to say ‘China will buy it,’” Byron retorts, “but that’s not entirely the solution. Even China has its limits, believe it or not. The global numbers show that more and more tanker loads of oil don’t have a home.”

The “shale gale” that Byron’s covered extensively has the effect of leveling off oil prices worldwide. On the global stage, “every barrel gets used,” he explains. “One estimate is that for every 1% shortfall on global supply, the marginal price could spike up by 20%. So let’s hope that it doesn’t stall, or you’ll pay $6 per gallon for gas”

Right now there’s an equilibrium — however fragile.

  “North American shale oil is not just complex technology,” Byron goes on, “it’s expensive too.

“The economics of the new oil patch dictate prices in the range of $60 and more per barrel to keep the wells pumping. Yes, new barrels are coming. But they’re not cheap, and every operator has a hard nut to crack every month to pay the bills.”

On the other hand, “the economics of that North American oil have a floor,” he says, “below which oil can’t fall for too long without severe disruption to supply. It’s like we’re in the eye of an energy storm. Enjoy it while we’re there.”

It’s a dicey time for many exploration and production companies in North America. In today’s 5 Min. Forecast PRO, we reveal a list of the most vulnerable that you might consider pruning from your portfolio. Don’t have PRO access? Sign up here.

  Stocks are leveling off again this morning — traders perhaps coming down from the sugar high of the super-size drinks that are, for the moment, still legal in New York City.

At last check, all the major indexes are in the red, with blue chips holding up better than small caps.

  Gold is making another run for $1,600 this morning. The spot price raced up in electronic trading about 90 minutes before the Comex opened. As of this writing, the bid is $1,592. Silver has firmed to $29.21.

  “Gold mining stocks are beginning to show subtle signs of life,” writes Greg Guenthner of our trading desk.

Greg’s been looking at a chart of GDX, the big gold miners’ ETF. “Last week, after holding about $36 for two straight days, GDX opened at its low — and then surged higher. Strong volume rushed in, chasing the price back above $37. That’s the first time during this six-month drop that strong volume has accompanied a move higher.

“If you’re looking for long-term buying opportunities in mining stocks,” says Greg, “watch for GDX to hold $37 as it consolidates last week’s move off its lows. Then, you’ll need price to confirm that a bottom is in place.

“Once GDX is back above $40, you’ll have a perfect low-risk entry point.”

  That’s got to be a better deal than subprime auto loan securities.

Our latest entry in the chronicle of the desperate reach for yield shows that year-to-date sales of securities backed by subprime car loans total $4 billion — nearly double the year-ago figure, says Deutsche Bank.

“Subprime auto sales,” the Financial Times informs us, “now account for 34% of all auto ABS issuance, surpassing levels last seen in 2007.”

We have every reason to believe this story will reach the same sorry end as securities backed by student loans…

  Small-business owners are feeling better about their prospects now that uncertainty about tax rates is (mostly) in the rearview mirror.

The monthly optimism index put out by the National Federation of Independent Business jumped nearly two full points last month, to 90.8. Good by recent standards, but only fair-to-middling by post-2009 standards and still awful in the big scheme of things…

“While the Fortune 500 are enjoying record-high earnings,” says the NFIB’s chief economist Bill Dunkelberg, “Main Street earnings remain depressed. Far more firms report sales down quarter over quarter than up.”

Asked to identify the “single most important problem” they face, 21% cited taxes and an equal number cited regulations and red tape. Another 18% cite poor sales.

  “The anecdotal evidence is amazing,” says Patrick Cox. “We’ve seen many people suffering from severe acne or rosacea experience complete recovery.”

Still another use is emerging for the tobacco-derived compound that’s on Patrick’s radar. It got much buzz at a recent meeting of the American Academy of Dermatology. “NF-kappaB,” says Patrick, “is the culprit in inflammation-based skin diseases as well as much premature aging of the skin.” The compound moderates NF-kappaB.

The company behind the compound, Patrick suggests, “may succeed in the dermatological arena before its efficacy in internal medicine is widely understood. This is simply because a cure for inflammatory skin conditions is a simpler and more believable story.”

  Meanwhile, we’re only “months away,” Patrick says, from publication of research examining the compound’s use to treat thyroid disease.

“Preliminary results of the study, carried out by scientists from the Johns Hopkins Medical School department of endocrinology in conjunction with the firm, have already been released, and they are spectacular.”

That’s on top of the already publicized research into the compound’s effects on Alzheimer’s and a key marker of heart disease.

“This completely unexpected biotechnology will, I believe, result in the biggest demographic event since the discovery and mass production of penicillin — perhaps even greater. It will also, I’m convinced, make investors very wealthy.”

[Ed. Note: We were floored by the number of people who clicked on the "crime of the century" video Patrick sent yesterday. If you haven't checked it out yet, here's your chance to do so. Patrick's next installment will arrive in your inbox tomorrow afternoon. If you were intrigued by Part 1, wait till you see the single biggest threat facing the U.S. military...]

  It was only a matter of time: The first Bitcoin hedge fund has emerged. Exante Ltd. established the “Bitcoin Fund” in Malta so individuals and institutions can get exposure to the digital currency.

Their website reads, “We do not invest in outdated financial instruments: real estate, commodities, bonds, stocks.”

Uh, we’re all for alternative currencies… but “outdated”?

Moving on… The fund has $3.2 million in assets under management and requires a minimum investment of $100,000 with an annual fee of 0.5%. It uses a combination of physical and digital security measures to protect and store its assets.

Cutting edge or fad?

Unfortunately, the foreign fund is not available to U.S. citizens. Blame it on the Foreign Account Tax Compliance Act, or FATCA, law passed in 2010 — the one that was tucked into a “jobs bill” and amounts to backdoor currency controls.

  In fact, it’s getting so hard to move assets overseas that hedge fund manager John Paulson is exploring what you might call “the Puerto Rico option.”

A year ago, the Commonwealth passed a law allowing new residents to avoid both local and federal taxes on capital gains. Thus, Paulson — the man who made a fortune shorting subprime mortgages — is looking to leave New York at age 57, according to a Bloomberg report.

“The Puerto Rican tax law,” Bloomberg explains, “provides a boon for someone like Paulson, who earns most of his money from investments. The federal rate for top earners in the U.S. is 23.8% on long-term capital gains and dividends and 39.6% on ordinary income, which includes short-term gains and interest. State and local taxes can push the marginal rate for rich New Yorkers higher.”

But to become eligible, you must live on the island for at least half the year and prove that you have significant family ties there. “You have to actually become a bona fide resident of Puerto Rico, bring your children,” a Puerto Rican tax lawyer explains.

With that in mind, Paulson is said to be looking at an 8,379-square-foot penthouse near St. John’s School — a private English-language academy where his two children could attend.

No comment yet from Paulson… or from Mrs. Paulson or the kids….

  “I had to chuckle,” a reader writes, “over the individual writing to The 5 who years ago had been a staunch Democrat. It would be fair to say that years ago, I would have been identified as a staunch Republican.

“I’ve followed Agora wisdom and ramblings for several years now and have concluded that, while I still gravitate toward being conservative, I desire a pox on both the political houses…

“The statists that seem to inhabit most areas of our government (in both parties) have devolved into the most monstrous, self-serving, lying, doublespeaking hypocrites imaginable. I marvel that anyone can be in such denial as to think that either party seeks the actual betterment of the populace. Au contraire, they seek to get re-elected and accrue the power that comes with being the keepers of Leviathan.

“While I do not always agree with you, please never stop injecting your political thoughts into the discourse.”

  “Since I learned to plow using mules when I was but a lad during the Great Depression,” another writes, “I have thought seriously about the problem we have with our present government.

“Apparently, our elected representatives of both parties are more interested in playing party politics than in serving we who elected them. It reminds me of trying to plow with a couple of asses. The first thing you have to do with asses to get them to work and act as a team is to get their attention; this is best done with a good stout stick whacking them between the eyes!

“With this in mind, I would like to propose that every congressional district and every state initiate a petition of recall for all elected representatives in Congress and in the executive branch. I grant you that these petitions are unlikely to result in many actual recalls; however, to defend these petitions, they will all have to spend time and money that they don’t have and will have to raise. Although this is an exercise in futility, perhaps, it will finally get their attention.

“I can only hope.”

The 5: Hmmm…

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. No matter what you see or hear about the budget debate in Washington this week, you can safely tune it out. Here’s what really matters.