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S&P to Eurozone: Fix It or Else…
By timing its downgrade threat to the same week as a key European Union (EU) summit on the debt crisis, Standard & Poor's is essentially telling Europe's leaders to "Fix it or else."
The ratings agency said late Monday that it had put the credit of 15 Eurozone countries, including AAA-rated Germany, on a 90-day watch. The move means each affected country has 50% chance of a downgrade.
European leaders are scheduled to meet in Brussels Dec. 8 and 9 to discuss EU treaty changes that would mitigate the debt crisis, such as restrictions on budget deficits. German Chancellor Angela Merkel and French President Nicolas Sarkozy unveiled an outline of the plan Monday.
The timing of the S&P warning "could hold leaders' feet to the fire and force them to go through with a comprehensive solution," Peter Jankovskis, co-chief investment officer at OakBrook Investments, told Reuters.
Reaction of the world's stock and bond markets was muted, with investors apparently looking ahead to the summit.
Money Morning Capital Waves Strategist Shah Gilani said it was "about time" the ratings agencies started to get serious about credit ratings in the Eurozone, saying they were behind the curve on such problems as mortgage-backed securities.
"Now they're pushing their new "ahead of the tsunami' PR campaign," he said. "Their PR agenda aside, they're right to be knocking these credits down to reality."
They Had it Coming
S&P listed several reasons for its warning.
"After a good two years of trying to manage the crisis, the political efforts have not been able to arrest matters," Moritz Kraemer, head of European sovereign ratings at S&P, told the Financial Times. "It is our view that this is a systemic stress, a confidence crisis that affects the Eurozone as a whole."
Those "stresses" include tightening credit, rising government bond yields, squabbling among Eurozone leaders about how to cope with the crisis and the rising risk of a Eurozone recession next year.
"We are approaching a very important moment where the crisis could take a very significant turning point for the worse and we want to warn investors," Kraemer told The FT. "Considering how the crisis has deepened and the challenges that they are facing, [the summit] is the last good opportunity that policymakers have."
Although the S&P said it would take the results of this week's summit into consideration, no one should doubt the agency's resolve. This past summer S&P followed through on a similar threat to cut the credit rating of the United States to AA+ from AAA following the debt ceiling crisis debacle.
"S&P's view is that the political outcome will also drive creditworthiness, and I don't think anyone in their right mind would dispute this point," Ashok Parameswaran, an emerging-markets analyst at Invesco Advisers Inc., told Bloomberg News.
More Turmoil Ahead
Should this week's Eurozone summit fail to go far enough to please the S&P, the real fireworks will begin.
Cheap Natural Gas Has Made This 85-Year-Old Technology Profitable
Although natural gas has become plentiful and cheap in the United States, using it in ways that would make it a practical alternative to petroleum, such as vehicle fuel, has proven challenging.
It's not that it can't be done. German scientists figured out how to convert natural gas to liquid petroleum products back in the mid-1920s.
Such products, particularly diesel fuel and synthetic engine oil, can be used in today's cars, trucks and jet planes today with virtually no modifications – a huge advantage over other natural gas fuel alternatives, such as compressed natural gas (CNG).
But the natural gas-to-liquid (GTL) process is expensive and requires large and costly facilities. Relatively cheap oil throughout the 20th century made GTL uneconomical for decades.
However, as the price of oil has risen in recent years, and as vast new reserves of natural gas have been discovered, interest in GTL technology has rekindled.
"With high crude prices, the economics of gas-to-liquid fuel have started to look much better," Sander Cohan, principal at energy-analysis firm ESAI Inc., told The Wall Street Journal.
It should be noted that GTL technology has nothing to do with the more familiar liquefied natural gas (LNG) process, which simply chills the gas into a liquid state for transport. GTL actually converts the natural gas into petroleum-like products, which would help reduce U.S. dependence on imported oil.
"The real prize is using natural gas to power our own vehicles," said Money Morning Global Energy Strategist Dr. Kent Moors.
Shell as Pioneer
Royal Dutch Shell PLC (NYSE: RDS:A, RDS.B) began production at its $18.5 billion Pearl GTL plant in Qatar earlier this year, with the first shipment of GTL base oil destined for lubricants arriving in Houston last month.
Shell estimates the plant will reach full production next year, converting 1.6 billion cubic feet of natural gas a day into 140,000 barrels of liquid fuels like kerosene and base oil in addition to 120,000 barrels of other products, such as condensate and liquid petroleum gas.
It already has at least one marquee customer: Qatar Airways has announced it will transition to GTL-based fuel in all of its aircraft next year.
Shell says the Pearl plant will account for 8% of its total production next year, making it the company's single biggest engine of growth. Last year Shell projected the plant would generate $6 billion a year in profit assuming oil prices at $70 a barrel. West Texas Intermediate (WTI) oil is now trading at over $100 a barrel.
Meanwhile, the price of natural gas has declined from between $6 and $7 per thousand cubic feet to less than $4 per thousand cubic feet. The more the prices of oil and natural gas head in opposite directions, the more profitable GTL becomes.
Just yesterday (Monday) Shell said it was considering building a GTL plant in the United States.
"We are looking for places where gas is cheap and [oil] products are expensive," Andy Brown, the managing director of Shell's Pearl project, said at a press briefing at the World Petroleum Congress in Doha, Qatar's capital. "Clearly the U.S. is something we're looking at."
That spread has other energy companies looking at GTL opportunities now.
The Other CPI: What the Christmas Price Index is Telling U.S. Consumers
The PNC Christmas Price Index, released by PNC Wealth Management (NYSE: PNC) measures the total cost of presents listed in the classic tune, "The Twelve Days of Christmas." This year, the price tag for an ambitious gift-giver buying all 364 presents hit $101,119.84, a 4.4% gain over last year's index.
This is the first time ever the total cost – which PNC calls the "True Cost of Christmas" -has risen to six digits.
Just supplying the 12th day alone, with one round of all 12 presents, would cost $24,263.18, a 3.5% increase from last year. That's almost twice as much as the 1.8% gain from 2008 to 2009, when the country was nearing the end of the recession, but not as drastic as last year's 9.2% leap.
The index is a light-hearted way to examine pricing trends; it's doubtful many shoppers are overly concerned with the price of birds and hired performers. The gifts might not be on most shoppers' lists, but what the index does represent is the various price fluctuations in our economy.
"Typically we see parallels between our index and the Federal government's," James Dunigan, managing executive of investments for PNC Wealth Management, wrote in the Index release.
The U.S. government's consumer price index in October was up 3.5% from last year, the same increase the Christmas song's shopper would see for one day's worth of presents. PNC also calculates a "core" index like the Federal government does. While the official core CPI is 2.0%, PNC's Christmas core, which excludes the volatile price of swans, is only up 0.7%.
The bird-heavy gift list in the song made for some double-digit price increases due to this year's rising feed costs. The biggest gainers: A 25% jump in the cost of two turtledoves, and a 14.2% increase to buy a partridge in a pear tree.
Higher commodity prices have led to higher food costs for U.S. consumers – not just bird shoppers – and along with energy have been the main cause of overall inflation this year. Food inflation will continue next year, with global food prices expected to increase 4%.
A Simple Solution to One of the World's Most Complicated Problems
Banks need fixing and capital markets need fixing. There's no debate about that.
Still, there's plenty of debate about what to do about it and too little agreement on exactly what to do about systemic issues, both in domestic and global markets.
But there is a solution – one so simple that if effectively implemented, market volatility will ease and investing will be more rewarding than day trading.
It could be dressed up in a lot of different ways, but ultimately it comes down to two things: transparency and uniformity.
We need transparency in the financial markets. After all, the murkiness of the derivatives market and other complex financial innovations played a crucial role in bringing down the entire global economy in the first place.
Nothing is workable if it's not transparent. Transparency has to be at the root of every resolution, of every solution, and in the construction of every fix to every issue.
Keep that in mind, because a lack of transparency is currently what's missing and what continues to hamper any workable solution to the problems we've been trying to tackle.
Specifically, when it comes to banks and capital markets, it's the lack of transparency that got us into the mess in the first place, and only by hammering ineluctable transparency back into our financial system can we ever climb out of our deepening hole.
We need transparent, globally agreed-to and enforced financial accounting standards and transparent, globally agreed-to and enforced bank capital requirements and regulations.
Transparency and Uniformity
The good news is we're already taking steps to fulfilling these two critical goals.
The Securities and Exchange Commission (SEC) has promised that by the end of this month it'll decide on whether U.S. companies will be able to abandon Generally Accepted Accounting Principles (GAAP) for International Financial Reporting Standards (IFRS).
Right now, most Group of 20 (G20) nations embrace IFRS, which are standards drawn up by the International Accounting Standards Board. But in the United States, most companies, including banks, use GAAP accounting mandated by the Financial Accounting Standards Board (FASB).
FASB rules have been the predominant set of standards adhered to in the United States since 1973. The FASB is overseen by the SEC, which has final authority over listed companies' accounting rules but defers to the FASB almost all the time.
It's not worth arguing about variations between the two sets of standards. All that matters is that we have one set of accounting rules for every person, every company — and especially every bank.
Of course, those rules should make transparency their number one goal. We need to agree on exactly how to account for derivatives and counterparty risk. We need to agree on how to risk-weight assets, and how to mark them and every other attendant accounting rule vital to transparency and gives regulators, analysts, and investors an apples to apples comparison of companies – especially banks.
Anadarko Petroleum Corp.(NYSE: APC) is a "King" in the U.S. Oil and Gas Industry
Anadarko Petroleum Corp. (NYSE: APC) has been a big player in U.S. onshore oil and gas production, and it's about to get significantly bigger, unlocking incredible profits for investors.
Anadarko has stakes in some of the most prolific U.S. oil fields in Texas, Colorado, Wyoming, Utah, and Pennsylvania. It's also an international leader in unconventional production, employing methods like horizontal drilling to increase productivity rates from deep wells.
But a recent major development will propel Anadarko to the top of the U.S. oil and gas industry.
You see, the company reevaluated one of its Colorado oil fields and now believes it holds between 500 million and 1.5 billion barrels of oil and natural gas. This is huge. A billion-barrel field is a rare find; only a handful have been discovered in the United States.
This new discovery could increase Anadarko's annual production rate in the region by 20% in 2012. It also prompted Tudor, Pickering, Holt & Co. analysts to name the company "King of the Rockies" and raise its net-asset-value estimate for Anadarko by 5% per share.
Anadarko was already solid, but the new discovery has made it a must-have investment in the oil and gas industry. It's time to buy Anadarko Petroleum Corp. (**)
Anadarko Petroleum Corp.: An Oil Industry "King"
Anadarko's big oil find came from the Wattenberg shale in northeast Colorado. The formation was first discovered in 1970 and is listed in the top 20 U.S. oil and gas fields.
Anadarko has been using horizontal drilling, the technology it uses in the Eagle Ford shale oil field in Texas, to unlock the liquid-rich Wattenberg. Based on 11 test wells, Anadarko is confident it can drill between 1,200 and 2,700 wells over time, and will ramp up Wattenberg's development by drilling 160 wells in 2012.
The Wattenberg wells also have a quick payback rate.
Maverick Judge Jed Rakoff Stares Down The Street
One of the biggest problems with Wall Street's malfeasance is how the ruling elite view legal settlements – as little more than an acceptable cost of doing business.
Well, no more.
Thanks to Judge Jed Rakoff we may see some real regulatory action leading to good old-fashioned investigations, perp walks, and even jail for the guilty.
Judge Rakoff recently rendered a 15-page decision rejecting the U.S. Securities and Exchange Commission's (SEC) $285 million settlement with Citigroup Inc. (NYSE: C) over toxic mortgages, calling it "neither reasonable, nor fair, nor adequate, nor in the public interest."
This is important because settlements like these have been a farce for years – little more than the financial equivalent of a parking ticket and having about as much impact.
In fact, in a world where banking secrecy is paramount and investment firms like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and others rule the roost, they're little more than obfuscations of the truth.
The investigations into these banks are toothless or highly secretive at best. Rarely does the public see anything even remotely resembling full disclosure.
Instead we're supposed to be placated by headlines insinuating that the SEC, the National Futures Association (NFA) and more than 20 other regulatory agencies are looking out for our best interests.
Who are they kidding?
A Drop in the Bucket
Remember the $550 million fine Goldman was forced to pay for its role in toxic credit default swaps (CDOs)? At the time it was the largest ever levied.
SEC officials couldn't stumble over themselves fast enough nor get enough sound bites. I recall lots of PR shots with earnest-looking people evidently proud of themselves for having made Goldman pony up at the time.
And the mainstream press loved it. But there was one tiny problem.
The firm booked $13.3 billion that year. Paying off the SEC in a settlement that neither admitted nor denied wrongdoing was an acceptable cost of doing business that amounted to a mere 4% of revenue.
The proposed Citi settlement was much the same. It would have required Citi to give up $160 million of alleged ill-gotten profits, $30 million of interest, and a $95 million kicker for negligence.
Bear in mind, Citi reported full-year net income of $10.6 billion on revenue of $60.5 billion in 2010 which means that, like the Goldman fine, the settlement is a drop in the bucket at a mere 1.50% of net income.
I think Judge Rakoff's ruling has been a long time coming. [To continue reading, please click here...]
Congress Finds One Thing It Can Agree On – Spending Your Money
Time and time again, a divided Congress has failed to come up with desperately needed solutions to America's debt and budget deficit problems.
But when a major spending bill came along last week, members from all across the political spectrum suddenly found themselves in agreement.
Last week the Senate approved a $662 billion defense spending bill for 2012 by a vote of 93-7. A similar bill passed the House in July by a vote of 336-87.
Still, another piece of financial legislation in the Senate last week that would help the average working American, the extension of the payroll tax cut holiday, failed – a victim of the same partisan posturing that led to the debt ceiling crisis this past summer.
In truth, there was some debate in the Senate on defense spending bill. However, the senators were arguing over a provision that could take away a citizen's right to trial should they be determined to be a member of al-Qaeda or its affiliates, or if they're suspected of involvement in a terrorist plot.
The vast $662 billion price tag drew little opposition, however.
The continued inaction on everything but spending proves once again why America hates Congress. According to the latest poll averages at Real Clear Politics, 81.2% of the American people disapprove of the job Congress is doing, a measure that hasn't gone below 60% since the middle of 2009.
"Having lost almost all faith in the legislative branch, people want Congress to prove us wrong," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "More gridlock is potentially catastrophic for our country and our way of life."
A Record of Incompetence
Despite a $15 trillion debt and yawning annual budget deficit, legislators in Washington have turned every attempt to address America's fiscal problems into a circus of finger-pointing and name-calling.
U.S. Consumers Finally Bouncing Back
Consumers shed housing debt in the third quarter while ratcheting up spending elsewhere, raising hope that the single biggest driver of the U.S. economy – consumer spending – is back on the rise.
Mortgage balances fell 1.3% in the July-September period, according to data from the Federal Reserve Bank of New York, while overall household debt shrank by 0.6%.
Such reduction of debt – deleveraging in economist-speak – has over the past couple of years dampened consumer spending, which accounts for 70% of the economy. But as consumers make headway on their obligations, they have more money to spend on things other than paying down debt.
"I think it's a positive sign," Mark Zandi, chief economist at Moody's Analytics (NYSE: MCO), told The Wall Street Journal. "It means households are getting their financial house in order and that their heavy debt loads are much less weighty than they were."
In fact, consumers are so eager to get back to spending again that debt other than mortgage balances actually increased slightly, and credit card inquiries were up for the second straight quarter.
"There is a silver lining in all of this," Anthony Karydakis, chief economist at Commerzbank AG (PINK: CRZBY) in New York, told Reuters. "Slowly but steadily, consumers are exploring more normal ways of returning to a more normal pattern when it comes to borrowing habits."
An unexpected spike in the Conference Board's November consumer confidence report released on Tuesday is another sign that people are more willing to open their wallets.
The measure rose from 40.9 in October to 56 – its steepest increase since 2003. Economists had forecast a rise only to the mid-40s. Until the November reversal, the consumer confidence index had declined steadily since February.
Of course, the index is still far below 90, a level that indicates a normal, healthy economy. But at least it's finally heading up.
"This is a huge rise in consumer confidence. It gets us back to second-quarter levels and further underscores the dramatic move that we've seen in consumer spending," Lindsey Piegza, economist at FTN Financial, told Reuters.
The "Miracle Material" That Will Change the World
A radical new material made from a single carbon atom will soon have a pervasive impact on the U.S. economy – and the entire human race.
Stronger than steel and lighter than a feather, this high-tech medium will shape virtually every part of our daily lives by the end of this decade.
The possible uses are almost limitless.
No wonder the two scientists who discovered this substance won the Nobel Prize in physics last year. That alone should tell you something.
It often takes decades for scientific breakthroughs like this to bag the world's biggest award. But these two Russians won it for a substance discovered just seven years ago.
The material that I'm talking about is called "graphene." And you might have guessed, graphene is related to the graphite used in pencils.
Graphene: The Miracle Material
If you've never before heard of graphene, don't worry – most investors haven't.
In fact, most investors have never seen anything quite like this new miracle material.
But it won't be long before you're benefiting from its potential.
Even as you read this, researchers and scientists are looking for ways to transform this discovery into the Next Big Thing.
Indeed, my Pentagon sources say military leaders want to learn how graphene will lead to victory on the battlefields of the future. Tech leaders such as International Business Machines Corp. (NYSE: IBM), Intel Corp. (Nasdaq: INTC) and Samsung Electronics Co. Ltd. hope graphene will be the foundation of the next generation of cutting-edge products.
And we can already see how graphene will spawn a true revolution in wireless communications.
We'll soon be able to launch satellites that are the size of skyscrapers – but that weigh less than your patio barbecue grill.
Bailout Bandits: The Biggest Borrowers From the U.S. Federal Reserve
The Eurozone debt crisis has replaced the U.S. financial crisis as the disaster du jour. But make no mistake: U.S. taxpayers will be paying the tab for the U.S. crisis for years.
That's evidently not true of the banking sector, however, whose massive financial-crisis windfall is just now coming to light.
In its January issue, Bloomberg Markets magazine reveals that – at the March 9, 2009 nadir of the financial crisis – the U.S. Federal Reserve had committed $7.77 trillion to rescuing the American financial system. That total was more than half the value of all that was produced in the U.S. economy for that entire year.
While this was going on however, it was a deep, dark secret. The Fed never let on, for instance, that American banks were in such deep trouble that they required a combined $1.2 trillion on Dec. 8, 2008 – "their neediest day," Bloomberg said.
But here's the best part: Many of the biggest banks have ended up doing great as a result of the central bank's largesse.
Here's why: Because these "emergency" Fed loans gave banks access to ultra-low (well-below-market) interest rates between August 2007 and April 2010, banks worldwide were able to earn an estimated $13 billion.
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, told Bloomberg that banks seemed to have it both ways.
Banks "were either in bad shape or taking advantage of the Fed giving them a good deal," he said. "The former contradicts their public statements. The latter – getting loans at below-market rates during a financial crisis – is quite a gift."
Shah Gilani, a financial-crisis expert and Money Morning columnist who edits the free Wall Street Insights & Indictments newsletter, put it more simply: "The average American has no idea how protected the big banks in this country really are. Maybe that's because the biggest bank in the world is the U.S. Federal Reserve. And it happens to be a creation of – and 100% beholden to – the banks that it is a master shill for. It also lies to us and covers up Wall Street's misdeeds."
What follows is a "power ranking" of the 20 banks that saw their outstanding loans peak at more than $25 billion – and some insight on how this Fed lending enabled Wall Street to profit, even as Main Street suffered.