Saturday, August 27, 2011

Saudi Arabia Needs High Oil Prices

Even though the unrest (Arab Spring) in the Middle East and North Africa is largely out of US headlines, tensions still simmer just beneath the surface in nearly every country in the region.

Well aware of this is the ruling royal family of Saudi Arabia, the world's largest producer of oil. They have come to the realization that, in order to stay in power, they must improve the living conditions for the country's 27 million citizens.

So this year the Saudi ruling family has taken decisive action.....

The Saudi government has initiated $129 billion in entirely new spending. These funds have gone towards new housing along with food and fuel subsidies. This amount is equal to well over half of the country's 2010 oil export revenues of $153 billion.

In addition, the Saudis are spending in excess of $100 billion over the next decade on power plants and electricity distribution networks.

Power demand in the kingdom is growing at rate of 8 percent annually, twice the country's growth rate. It is estimated that by 2018 Saudi Arabia needs to raise its power generating capacity from the current 45,000 megawatts to 75,000 megawatts in order to meet demand.

Based on all this extra spending by the Saudi government, veteran oil observers believe Saudi Arabia's oil revenues needs are rising rapidly.

In fact, on a percentage basis, rising to match those of the two most prominent oil price 'hawks' – Venezuela and Iran. This is a significant change for Saudi Arabia, a traditional oil price 'dove'.

Jadwa, a Saudi-based investment firm, estimates that Saudi Arabia now requires oil prices to average in the $80-$83 range in order to balance its budget. [So far this year, oil has averaged about $10 a barrel higher]. This is up from less than $40 a barrel five years ago and about $20 a barrel a decade ago.

The Institute of International Finance agrees with this assessment and even went further. It said that by 2015, Saudi Arabia will need oil to average $115 a barrel in order to balance its expanding budget.

If oil does shoot up to those lofty levels, a good way for investors to track that is through the use of an ETF – the United States Brent Oil Fund (BNO). It is based on Brent crude oil futures contracts which more closely tracks the global price of oil than does the US-based West Texas Intermediate (WTI) futures contracts.

Thursday, August 25, 2011

Apple Without Its Core

Change at the top can be wrenching in Silicon Valley. At many technology companies, founders loom large and success is often closely tied to his or her personal vision.

This is especially so at Apple (NASDAQ: AAPL). News of its founder Steve Jobs' resignation as CEO sent Apple shares lower.

Mr. Jobs is widely credited with returning triumphantly to Apple over a decade ago to lift it from irrelevance to be battling only ExxonMobil (NYSE: XOM) as the most valuable US company.

He has personally overseen the introduction of products including the iPhone, iPod and iTunes online music store. The popularity of these products has transformed the hand-held computing, mobile phone and digital download markets. Mr. Jobs is also the driving force behind the iPad. In its first year, it has captured a large chunk of the tablet computing market and spawned a host of imitators.

“He's redefined consumer electronics this century,” said technology analyst Richard Doherty.

Steve Jobs is also seen as the guardian of the powerful Apple brand. And as the visionary who has presided over a successful melding of digitized content with reliable consumer electronics products.

The Next Stage

What comes now for Apple's investors? Apple has been heavily criticized for not making public a clear plan of succession at the company.

For now, as he did during Mr. Jobs' prior leaves of absence, Apple's chief operating officer Tim Cook will run the show and become the CEO.

Mr. Cook has been with Apple since 1998. During this time, he learned the value of instinctive decision-making working for the creative and exacting Mr. Jobs. The ability to balance his engineering, manufacturing and business background with the more rapid and innovative decision-making style he has learned from Mr. Jobs will be critical in the months ahead.

Apple does face a crucial period as it makes its bets on its new wave of technologies. This wave includes the next generation of its celebrated iPad tablet and iPhones.

In the short term, Apple will continue to flourish. Mr. Jobs departure will have little impact for at least a couple of years. As Charles Golvin, an analyst at Forrester Research, said “The next wave of [Apple] products has already been designed.”

Based on his prior stints running Apple, in 2004, 2009, and most recently, Mr. Cook will most likely do a fine job again. So Apple shareholders will have little to worry about for now. But he still has much to prove if he has to take over Mr. Jobs' role over the long term.

Does Apple Need a “Great Person”?

Whether Mr. Cook will be the one to take Apple forward or a future dark horse will emerge with an unerring sense of what consumers want, ala Steve Jobs, is the great uncertainty for Apple shareholders.

Corporate history tells us that the more “creative” a business is, the more of a difference a visionary executive can make. Look at Mr. Jobs, perhaps the world's greatest electronics products genius.

Many Apple shareholders cannot imagine that the company would have gone from near extinction little more than a decade ago to the success it is today without Steve Jobs. And they cannot imagine Apple maintaining its dominance without him or his clone. They are believers in the “great person” theory of business.

Apple's Future

But what about the non-believers in this theory, who don't have a cult-like obsession with Mr. Jobs? How should they look at Apple right now?

How important Steve Jobs actually is to Apple is unknowable at this time. The company's PR machine has created a monster by not reining in the perception that Steve Jobs IS the company.

But no one man, no matter how talented, can run a company in today's global economy alone. Some of the company's best ideas have actually bubbled up from below rather than coming directly from Mr. Jobs.

All along Mr. Jobs has had the help of Tim Cook and many others. The difference is now that Mr. Cook will be the point man instead of the more colorful Mr. Jobs.

And again, Mr. Cook will not be alone in running Apple. He is backed up by a strong 'bench' – industrial design chief Jonathan Ive, marketing chief Phil Schiller, Scott Forstall, the executive in charge of iOS software and other talented executives. In fact, some former employees have suggested that the decision-making process will be even smoother now than with Mr. Jobs as CEO.

A look at Apple's stock shows that it trades at a reasonable ratio to 2011 earnings. Additionally, Apple is still growing strongly and has 30-odd per cent operating margins that are the envy of other phone and PC makers.

So for the short term any weakness in Apple's stock looks like a buying opportunity for investors. The longer term outlook is still unknowable.

Saturday, August 20, 2011

The Trio of Investor Terrors

August has not been a kind month to stock market investors, with about $6 trillion wiped off global equity market valuations so far.

We have seen in August the most 200 point moves in the Dow Industrial Average since December 2008 when the US financial system seemed on the verge of meltdown. Volatility is also at its highest level since the fall of 2008 when Congress was debating TARP.

Why is this happening now? It's simple fear. Investors are facing three major headwinds, what I call the “trio of terror”.

The first fear that investors face is that global economic growth is slowing rapidly. Investors had bid up stocks to levels where the US economy, for instance, would have to grow at a 5% rate to justify the valuations.

Meanwhile, the US economy “grew” at only a 1 percent rate in the first half and it is still decelerating.

In Europe, the problems in nations like Greece are well known. The problem is that the engine of Europe, Germany, is slowing rapidly. Its economic growth in the second quarter of 2011 was almost nonexistent.

Even the emerging markets are slowing, although China and India are still growing at about a 7%-8% rate.

The second fear investors face is renewed worries about the global banking system.

It seems that several European banks have had to turn to their central banks for emergency funding. That is because the value of sovereign country bonds in their portfolios had fallen sharply.

The stocks of US banks, such as Bank of America, have also fallen steeply. What worries me most about US banks are the denials on the financial news networks about their troubles.

All the talking heads say the banks are in fine health which is reminding me more and more of 2008 before their problems were revealed to the public. After all, let's recall nothing has been done about all their bad debts. The debts have simply been locked into a 'closet' and forgotten about while Wall Street partied on the Federal Reserve's free money. But the debts are still there in the 'closet'.

The final fear investors face is their lack of trust, both in the US and Europe, of the political leadership.

Investors are waking up to the reality on both sides of the Atlantic that their political leadership is either unwilling or unable to deal with the debt problems facing both Europe and the US.

This may end up being the toughest fear for investors to overcome. That is because, particularly in the US, we need the type of leadership that has not been seen in this country for decades.

Saturday, August 13, 2011

Wall Street Casino Games Continue

It was a volatile past week on Wall Street with several hundred point swings up and down every day the norm.

Much of the action was driven by “the machines”. These are the companies who use computers to trade constantly every few seconds over the course of the trading day. These jackasses don't even hold a stock for more than a few seconds.

This week's action just goes to show what a casino Wall Street has become. It is no longer a place for investors to park long-term money.

That is because if “the machines” don't get you, “the boyz” will. “The boyz” are the big Wall Street houses like Goldman Sachs.

For instance, the big 400-point rally on Tuesday was due almost entirely to Goldman Sachs buying a boatload of e-mini S&P stock futures. And my guess is these futures were bought with “free money” from the Federal Reserve. “Uncle Ben” Bernanke makes sure the casino is always well supplied with “chips”.

“Uncle Ben” had already given Wall Street a nice present when the Federal Reserve announced on Tuesday that interest rates will stay at near zero for at least two years. So the flow of “free money” to Wall Street will go on for at least two more years.

There was one other interesting note this week.

Some European countries are banning short selling in their markets. Short selling often involves selling stocks or bonds that you don't own, in effect betting it will drop.

Instead of this broad ban on short selling, I really wish the Europeans would have narrowed their focus.

Everyone who is in the market knows where these “attacks” on the European markets are coming from. They are coming from Wall Street.

It's that old game I touched on last week. If Wall Street can attack other markets and make them look even worse, they can say “Don't take a chance with those 'dangerous' foreign markets. Stick with the 'safe' US markets...give us your money.”

This strategy makes Wall Street a winner twice over. They often profit from their short sales and they keep 90% of American investors at home, where it is 'safe'.

The Europeans should have just banned trading from American firms and their subsidiares until they learn to quit acting like barbarians on a rampage, pillaging everywhere and everything.

Saturday, August 6, 2011

US Debt Is Downgraded

What a week in the financial markets! The week-long rout wiped $2.5 trillion off global markets.

And there maybe more fireworks to come.....

After the US stock market closed on Friday, Standard & Poor's announced that it had indeed downgraded the credit rating of the United States.

It lowered the rating by a notch from AAA to AA+. Ominously, S&P kept its outlook “negative” which means the US could be downgraded again in the next 12 to 18 months.

This downgrade will eventually result in a rise in interest rates which may be devastating to a weak American economy.

The problems with the US economy and stupid policies by the Federal Reserve – money printing to save Wall Street – have already resulted in a very weak US dollar and a lower standard of living for many Americans. Higher interest rates will just make things worse.

But interest rates will not rise for a while because of what I mentioned last week. The geniuses on Wall Street are selling other assets, like stocks, and running to the “safety” of US Treasuries.

The yield on one-month Treasury bills this week actually went negative this week. The Wall Street geniuses were actually paying Uncle Sam to hold their clients' money for them. The stupidity of that cannot be put into words.

Why was Wall Street in such a panic?

They were in a tizzy over Europe, afraid that large countries like Italy and Spain would default on their debt. But at the same time, they ignore the greater threat of a US default a few years down the road.

Yes, the debt problems in Europe are very serious. But if one looks at the whole picture (such as unfunded liabilities), the United States' debt problem is much worse.

Think of it this way...think of the sun and the moon. US debt is sunlight, European debt is moonlight. Which is brightest? Both are bright, but we all know which is brighter (the bigger problem).

So why does Wall Street go nuts over European debt, but have no worries about US debt?

They are simply using a trick that all magicians use. Magicians distract the viewers with movements or even pretty assistants to draw attention away from what they are really doing.

Wall Street keeps pointing to Europe saying, “Look at how bad things are over there”, so that investors won't notice how bad things are here.

Because if investors do focus on what is going here, the game is over for the denizens of Wall Street. No more cushy jobs making money by taking the hard-earned money of investors for their “sage” advice and recommendations.