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BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence March Increased Minimum Wage & Extended benefits lead to Higher Unemployment April Ethanol from corn & Agflation May Cash for Clunkers lead to Higher Used Car Prices & Wasted Tax Dollars June The Affordable Care Act; Anything but Affordable Part 1 July The Affordable Care Act; The poster Child for False Advertising August Detroit: Higher Taxes + Liberal Benefits = Bankruptcy September No Keystone Pipeline leads to more pollution October Global Warming! Or is it Global Cooling! November Poverty & Benefits December Does Affirmative Action lead to Reverse Discrimination?
Blog Topics 2014
January Will Lake Meade become another Aral Sea February Does Taxing the rich hurt the economy March The Cause of the Great Depression April Temporary Agricultural Subsidies lead to wealth Farmers and Higher Prices May The Presidents Stance on Gun Control leads to Increased Gun Ownership June Is there really a Gender Pay Gap July Did the Supreme Court decision in Roe v. Wade lower the crime rate
After advancing 140 points on Wednesday, the Dow went up another 60 points Thursday to finish above 17,000 at 17040, 22 points short of its all time high. At one point during the pre-market today, the Dow was up 20 but is currently down 11 as a result of reports of a minor Russian incursion into the Ukraine, however it doesn't appear to be a major drag. The big news today will come at 10 AM when Janet Yellin speaks at the Fed's annual Jackson Hole symposium. According to CNBC, "Yellen's speech topic is "Re-Evaluating Labor Market Dynamics" and she was expected to repeat her comments that the Fed needs to maintain easy policy that will help the labor market heal. Fed watchers were also hoping to get more guidance as to what metrics Yellen is watching on the labor market." If this occurs, it should bode well for the market other things remaining equal. The other factor that is helping markets (and your pocketbooks), is the decreasing cost of a barrel of oil and gas at the pump. Oil is now trading at under $94, and the average cost of gas nationwide is $3.42/gallon. I filled up yesterday in Exeter NH at $3.35. There are a number of factors involved in this relatively low price. First and foremost is the price of oil. What determines oil prices is very simply, supply and demand, and both sides of the equation (supply=demand) are contributing to the declining price First, demand. The US currently uses about 19 million barrels of oil per day(World oil demand is 90 million barrels). This is down from 21 million barrels prior to the recession. Demand is down because of lower use. (I know, brilliant statement). Why the lower use; mainly, technology. Cars and trucks are more fuel efficient and because of advances in fracking, we are substituting natural gas for oil in both electricity generation (this isn't that big of an effect because only about 2% of electric generation uses oil, mainly in Alaska and Hawaii), and more people are substituting natural gas for oil to heat their homes and businesses. Natural gas is less than 1/2 the price of oil and since it is delivered by pipeline, there are no distribution/transportation costs. What is also helping to lower the price of oil is the substitution of natural gas for coal in electric generation. How, you ask, does this affect the price of oil? Coal is being used to supply 50% of the nations electric generation. It is now down to 38% (natural gas has increased from 18 to 27%); as a result of using less coal, we don't need to transport that much coal. Since coal is transported by diesel railroads, there are less train trips and lower demand for oil. Supply side is simple. Fracking not only gets us more natural gas, but more oil too. By 2020, The EIA (Energy Information Administration predicts the US will be the number one oil producing country in the world. We are currently producing 8 million barrels/day and are forecast to double within 10 years.
The Dow is once again closing in on 17,000. It finished the day at 16,919 after advancing 81 points. Today's gains were a function of good economic data and relatively calm geopolitical conditions prevailing. I say relatively calm since the cease fire between Israel and Hammas expired. Hammas fired 3 rockets at Israel that went awry and blew the hell out of 3 cacti in the desert. Israel said they would respond in kind. The economic data was much more significant. Housing starts (single and multi-family) in July increased by 16% (think jobs and banks loaning money that have a multiplier effect). Sinle family homes increased by close to 9%, and multi-family buildings (apartments) increased by a whopping 33%, the highest level since 2006 which was the height of the expansion. The other good economic news had to do with inflation; specifically, lack thereof. The CPI (Consumer Price Index) increased .1% in July mainly because decreasing energy prices offset increasing food prices. For the past year, inflation has been a tame 2%. According to CNBC, "The Fed last month said the risk of inflation running persistently below its target had diminished somewhat. It has kept its overnight lending rate near zero since December 2008 while nursing the economy back to health." The average price of a gallon of gasoline is $3.45 and oil has come down to under $97/barrel. ENERGY Because of fracking, energy prices in the US have been decreasing. The problem with natural gas used to be supply, lack thereof, however, the problem is now infrastucture, lack thereof (chart below). Similar to 78% of all homes and businesses in the northeast, I heat my home by oil. I would love to heat by natural gas at less than 1/2 the cost, but the nearest natural gas line to my house is 5 miles away; and that is the case for most residences and businesses in the north east. Like myself, your probably wonder why the natural gas companies aren't building more pipeline. They're trying, but think environmentalists, the same environmentalists that espouse the use of natural gas over fossil fuels, and people with NIMBY concerns (Not In My Back Yard). For instance, six New England governors put forth a plan to protect the region’s power grid customers from spikes in electricity prices similar to those experienced last winter. According to Sentinalsource.com, "One main component of the plan is a gas pipeline proposed to run from New York through northern Massachusetts. At one point, the pipeline would run for a ways about 5 miles south of Winchester, Richmond and Fitzwilliam. Tennessee Gas Pipeline Co., which is owned by Kinder Morgan Energy, would pipe the equivalent of 500 million cubic feet per day of fracked natural gas from Pennsylvania and farther south to a hub near Lowell, Mass. That would account for more than half the capacity increase the states are seeking." However, local residents and environmentalists are fighting this. As I've said previously, pick an energy source, and there's an upset environmentalist somewhere. FYI a BTU stands for British Thermal Unit and is a measure of energy. One BTU produces the same energy as a match head. MBtu is a million BTU's. GSHP is a geothermal heat pump; very expensive to install.
The Dow was up 90 points in pre-market trading and never looker back. The Dow finished the day at 16,839, up 175 points. Decreasing world tension was the catalyst. In Iraq, the Kurds took back a strategic dam from Islamic extremists and Putin Stated that Russia and the Ukraine are resolving the firing on a Russian Convoy by Ukrainian troops. In addition, earnings have been a bright spot for stocks and could continue to give them a boost. Current price to earnings ratio's, PE, on S&P 500 stocks are at 16.7 which is approximately the 30 year average. The PE is the price of the stock divided by Earnings per share. Generally the higher the PE, the more over valued stocks are (there are exceptions such as high growth stocks). More on Obamacare In a recent survey by the New York FED on businesses, the median increase in healthcare premiums is expected to be 10%. More than a quarter of the manufacturing and service firms surveyed said they either have or will boost prices for goods and services "because of the effects that the ACA is having on your business." About 20 percent of respondents said they were reducing their number of workers and/or raising the share of part-time workers as a result of the ACA. His is in stark contrast to the presidents remarks earlier this year that healthcare costs are decreasing. Maybe CEO's were right when they said the president "Just doesn't get it".
DOW 1 day
Would Vladimir Putin make a great Bond villain or what? The Dow was plodding along fat, dumb and happy until 10:50 when the news hit the wires that Ukraine armed forces fired upon an armored Russian convoy on Ukraine soil. There still remains the question as to what the convoy was doing, particularly after Russia announced it would be pulling its troops away from the border. The Russians stated it was carrying humanitarian supplies while the Ukrainians stated that it was an armed incursion carry weapons to separatists in the eastern Ukraine. As a result, the Dow quickly went from a positive 40 to a negative 130 points before clawing its way back to 16,663, down 51 points for the day. As a result of this geopolitical concern, previous somewhat battered oil stocks made gains. Conoco Phillips, Ultra Petroleum, Chevron Texaco, Haliburton and Schlumberger were all up. I have positions in UPL, Ultra Petroleum and a little known Crude Cargo carrier, VLCCF, Knightsbridge Tankers.
After finishing up 91 points on Wednesday, the Dow was up 61 points today closing at 16,714, and once again approaching 17,000. Once again, it is a trader's market with only 110 stocks reaching 52 week highs out of a universe of over 8,000 publicly traded stocks. As I've said before, it is a traded markets with one very notable exception. Shares of Berkshire Hathaway class A stocks (BRK.A) closed at $202,850/share. That's right, 1 share of stock cost $202,850 (chart below). Very simply, Warren Buffet doesn't believe in stock splits. Warren Buffet buys companies that are managed well and keeps the managers/owners (think Jordan's Furniture), he also does long tern value investing made famous by Benjamin Graham who gained fame in the 1920's by looking at a company's book value, and if it is greater than it's current price, he would buy it. The stress is on long term investing and dividends. Using this strategy, Buffet has built Berkshire into a roughly $300 billion company. They have a class B stock (BRK.A) that sells for $135. Given that it's a traders market, let's look at some stocks. CNX, buy now and trade at $42; Suncor Energy, SU, buy now and sell at $40; Snta, buy at $4, sell at $4.30 and OPK, buy at $8.80 and sell at $9.20. For value plays that are selling less than book, AIG, KGC, GNW, and JBLU.
Job Creation by Month
July Jobs Report The economy created 209,000, in July, short of the expected 230,000 and the unemployment rate increased .1% to 6.2%. The reason for the uptick in unemployment despite the increase in jobs was more people entered the work force thereby increasing the labor force participation rate to 62.9% and once again, the percentage of long term unemployed decreased to 32.9%. The high was over 43%. Over the past six months, the economy has added 1.5 million jobs, marking the strongest six months for hiring since 2006. Teenage unemployment remains stubbornly high at 20.2%. The average workweek is 35 hours (includes part-time workers) and the average hourly wage is $24.45. To put it in perspective, the average workweek in France is 27 hours. By law in France, an employee can't work more than 35 hours unless it is an extreme emergency.
Commentary on Minimum Wage
There is currently a debate in the state of NH on whether to increase the minimum wage to 8.25 from 7.25. The main argument is that it will help to alleviate poverty. That is clearly not the case. As you can see from the chart at the left, the poverty rate dropped dramatically in the 1960's. This was a function of great society legislation; specifically, increase in Social Security benefits in addition to the inception and implementation of Medicare and Medicaid. Since then, the poverty rate has fluctuated between 9-15% and is highly correlated with the unemployment rate. The vertical grey area's in the graph represent periods of recessions in the US. As can be expected, unemployment rises during recessions and peaks at the end (unemployment is said to be a lagging indicator). As you can also see from the chart, so too does the poverty rate. There is no indication whatsoever that the poverty rate is affected by increases in the minimum wage. Generally, this is quite the contrary. As can be evidenced from the below left chart, increases in minimum wage can contribute to unemployment and as we can infer from the above chart, as unemployment increases so to does poverty. If you look at NH, they have the lowest state poverty rate in the nation and it generally parallels the national unemployment rate. By raising the minimum wage, you increase business costs. As a result; businesses either pass these costs onto the consumer (in which case inflation nullifies any wage increase), substitute capital for labor, or simply go out of business. If you look at the chart below right, UAW (United Auto Workers) membership has decreased in the late 1970's from 1.5 million to 350,000 in 2009. The reason for this is simple. Detroit isn't making fewer cars, they are making more, but they have made their assembly lines more robotic and have substituted capital for labor, which became cheaper in the long run. This can also happen to those fast food workers who want a $15 minimum wage. There is currently a machine on the market that can make 300 burgers/hour. In other words, capital can be substituted for labor. Someone please e-mail me and explain how someone is better off unemployed at $8.25/hour as opposed to being gainfully employed at $7.25/hour
You cannot legislate equality. If you want to decrease poverty, implement policies to insure that higher level education is available to all.
The Congressional Budget Office predicted this week that more than 2 million people will leave the labor force because of Obamacare. Specifically, more people will leave the labor force or reduce their hours, to stay under the cap for federal subsidies. If you are a family of 4, and household income is under, WAIT FOR IT, $94,000, you are eligible for a federal subsidy. The number of part time/temporary workers has already increased by 35% since Obamacare was passed in 2010; and yes it will get worse, wait until 2015 when it becomes mandatory for businesses.
For a good laugh on Obamacare, go to this web site and watch this video; http://www.youtube.com/watch?v=qpa-5JdCnmo. It shows the president on 36 different occasions stating that if you like your healthcare plan you can keep it. Obviously there are 1 of two explanations for this misunderstanding. He was ill advised on the 2700 page, 4500 provision Affordable Care Act, or he knew about it and lied. According to a study by Forbes magazine, the ACA will increase premiums to men under 27 by 77%, 40 year olds, 37% and 64 year olds by 37%.
When Obamacare was 1st released, The Congressional Budget Office predicted that it would cost $900 billion over 3 years. At the time, I made a prediction to my students that I estimate the final cost would be closer to $3 trillion. Three years later, the CBO has raised it's estimate to $1.6 trillion. At this rate, we are on pace to reach the $3 trillion mark. www.healthcare.gov, the official website to sign up for Obamacare had an original cost of $100 million. That cost is now up to $292 million dollars and rising. If the government can't manage the costs on a web site, and these costs have trippled since it opened on October 1, how can it possible manage a 2700 page, 4500 provision bill. The words of Nancy Pelosi (see above) are acting as a harbinger of doom: "We have to pass the bill, so we can find out what's in it."
The United States has amongst the lowest savings rate for all technological nations. The iOMe challenge is a nationwide competition between Colleges where teams submit a 10,000 page essay on how Americans can improve their savings rates. In addition, teams must produce an approximate 60 second video which complements the essay. If you click on the iOMe logo above, it will take you to Bentley University's 2012 video submission. The faculty adviser for the challenge is John Tommasi and is offered during his Fall EC 351 course, Contemporary Issues in Economics. I'm pleased to announce that on February 15, Bentley was declared the winner of the iOMe video portion of the contest. Congrats to the team members and great job!
EC 3900 Energy Economics
EC 3900, Energy Economics and International Markets, is a 3 credit, Short Term Program, that is offered during Spring semester. After 7 weeks of lecture, the class takes a 10 day educational/cultural tour to France where 80% of their electricity is produced by nuclear power. During the 10 day trip, students travel to, and tour various nuclear facilities Last year's class visited; Marsailles, Aix en Provance, Lyons, Brest and 4 days in Paris.
If there were ever words that can strike fear into the hearts of any man women or child, it's: "I'm from the Government and I'm here to help". On a monthly basis my blog, from an economic standpoint, will explore government laws, decisions and actions, which while well intentioned, had inadvertent results that were either disastrous, or made a bad situation worse. It wouldn't surprise me if you reached the conclusion that congress does two things well, nothing and overreact; and you may ask yourself, do Congressional members vote for what is best for the economy, or what will get them re-elected.