Byron King in Energy and Oil looks at the reasons behind the TNK-BP dispute:

The Kremlin has invested heavily in Russia’s image as an energy superpower. During the recent Russian Victory Day celebrations on May 9, many commentators referred to Russia’s energy sector as one of the key elements of Russian power. Energy took a top billing, right along with Russia’s traditional military might and still-potent nuclear capabilities.

Russian leaders have pledged to continue increasing the country’s output to meet rising demand, especially in Asia. The first foreign trip by incoming Russian president Dimitri Medvedev was to China, where he made numerous announcements about energy cooperation between Russia and the Middle Kingdom.

But many experts have long pointed out that Russia’s petroleum industry is working under serious constraints:

Most Russian oil fields were discovered in the 1950s, 1960s and 1970s. During those energy-rich times, the then-Soviet developers skipped over all but the largest deposits. Later on, the smaller fields were developed, but these fields cannot make up for the fading giants of the past. New discoveries of any size are quite rare, even in the vastness of Russia.

Much of the equipment and technology in the Russian oil patch is outdated. In recent years, Russia has imported large amounts of Western equipment. Russia has also brought in Western personnel to help maintain oil output. Western oil service firms like Schlumberger and Baker Hughes have a large presence in Russia.

The private parties who acquired many energy Russian assets after the collapse of the Soviet Union made little in the way of long term investment. All along, there was serious doubt about the sanctity or security of the property rights these tycoons acquired in the wake of the collapse of the Soviet state. Hence there was a “boom” mentality that led to rapid exploitation of the easiest resources, with little thought for the long term.

The Russian government imposes confiscatory levels of taxation on the oil industry, with some marginal rates approaching 90%. Thus the high world prices for oil benefit the Russian treasury, but leave little in the hands of oil developers for new investment.

Despite all of this, Russian oil output has been growing at impressive rates for the past ten years or so — in the nature of 5% to 10% per year in some years. But in 2008 that growth has stopped abruptly. Output figures have actually reversed. In absolute erms, Russian oil output is down in the first four months of 2008. Russia may have reached its own “Peak Oil” point, much as the US did in 1970. This has grave implications for the growth of the Russian energy sector, and the larger Russian economy.

If Russian oil output has peaked, we can expect new kinds of both rhetoric and behavior from Russia in its domestic policies, as well as in its dealings with other nations. In all cases, you can expect to see Russia pursue its own security and national interests with a strong hand, if not with a vengeance.

Frontier Life

When the stock market turns ugly, the quest for “non-correlated assets” intensifies. A non-correlated asset is fancy Wall Street talk for something that doesn’t move lock-step with the overall market. When the market falls, a non-correlated asset might actually rise, or at least hold its own better than the market.

Gold is a classic example. Its price tends to rise during times of stock market distress. But very few investments can rival gold’s long history of non-correlation. Imposters abound. The imposters might move independently of the overall market for months or years at a time, thereby creating the impression that they are non-correlated. But when the markets really turn nasty, investors often learn that their “non-correlated” asset tumbles just as sharply as an S&P 500 Index fund.

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However, some investors think they’ve found a reliable new non-correlated asset: “frontier markets.” Merrill Lynch recently created an index not only to track them, but for investors to buy and sell them.

Frontier markets include Pakistan, Kuwait, the United Arab Emirates (UAE) and other markets throughout Africa and the Middle East. They also include Vietnam, Kazakhstan, Cyprus and others. They are individually too small for institutions to invest in, but cobble them together in a new index that allows you to buy and sell the basket and… well, then you have something.

Merrill Lynch’s new Frontier Index tracks the 50 largest companies in 17 frontier markets. Even so, the market value of all these companies combined is only about $330 billion – or about that of General Electric. Right now, the index heavily tilts toward the Middle East, with 50% of the index in the region. Asia is the second largest component, with 23%, followed by Europe at 14% and Africa at 13%.

As for industry groups, banks usually are among the biggest companies in any emerging market. So banks and financial service companies represent about 65% of the index. Oil and gas is the next largest sector, weighing in at 13%. As far as countries go, the top three are the UAE (23%), Kuwait (18%) and Pakistan (14%).

So far, these frontier markets have lived up to their advance billing of not following the broader markets. Since Sept. 30, for example, the frontier markets actually gained 31% while the broader market lost ground. Merrill Lynch backtested the index several years and found that between February 2000-December 2007, the index return’s correlation with the S&P 500 was only 32%. Basically, that means that about two-thirds of the time, the frontier markets zigged while the S&P 500 zagged.

I love the idea of frontier investing, because I’m an optimist when it comes to global trade and booming overseas markets. Maybe it’s my globe-trotting that’s skewed my view. But when I travel overseas, I see great opportunity. I see people building businesses. I see the impact of global market forces on local energy, food and resource markets. I see the world getting smaller.

I’m long-term bullish on markets such as the UAE, Kuwait, Vietnam and others. But I also realize that the ride in some of these markets will be absolutely gut-wrenching. Just look at Vietnam.

The Vietnamese economy is growing somewhere between 7-9% per year. It is a cheaper place to do business than many other parts of Asia. Hence, Vietnam continues to attract a strong flow of investment.

While I liked what I saw going on there, I found no direct investment ideas for us. The market is just too small and illiquid. Heck, before March 2002, the market traded only on alternate days. Moreover, as with most of these frontier markets, Vietnam suffers from poor disclosures and low transparency. When you invest here, you’re really not sure what you’re getting.

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~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

I remember listening to Carlo Cannell, a very good investor at Cannell Capital, talk about his trip to Vietnam and his investments there. This was back in May 2007. The theme was investing in the dark. In Vietnam, he basically made many blind bets on lots of companies, figuring enough of them would work out.

But the market has tanked since then.

Perspective, though, is everything in markets. That chart looks nasty, with a near 50% drop from the high in less than a year. But as recently as July 2005, the index was only 250. You’d still have more than doubled your money in less than three years. In 2000, it was only 100. Investors are still up sixfold from 2000, which is a lot better than an investment in the S&P 500 Index. And that’s really the key to the whole frontier market idea. As an investor, what’s most important is what happens over the years.

I’m skeptical of the idea of frontier markets as an “non-correlated asset” for all seasons. Links between these small markets and their bigger brothers are probably stronger now than in the past. Vietnam, for example, depends heavily on foreign investment. Vietnam’s currency, the dong, is still linked with the dollar. So we have to be careful in taking the past and saying the future will work the same way.

The Guara exploration well struck oil in the BM-S-9 concession area – the same block as September’s Carioca discovery, which could contain as many as 33 billion barrels of oil.

“There are those who will tell you that oil is a cyclical business and a global fungible commodity,” says Christian DeHaemer in Taipan Daily.

It rises and falls with the business phase. If you look at a hundred-year chart, it is as obvious as a sidewinder on a sand dune. A sine wave through time — up and down in seven-year cycles.

But there are others who believe in the “Peak Oil” argument, the ultimate end-game, like a Suburban crushing a Subaru at the end of a long hill. Peak Oil enthusiasts will point to long lists of numbers, detailed maps of known reserves, past prognosticators of genius, and declare with tinfoil-hat fervor that “we are running out of oil.”

I’ve read these books and listened to the speeches. The idea that there is a finite amount of oil on the planet, and we are near the point where we will extract less in the next hundred years than we did in the past. Makes sense to me, as does the business cycle. I don’t know if the hundred-year history of the oil cycle is over. There is always a “this time it’s different” ideology at the peak. But then again, sometimes, it is different.

What we do know — what isn’t in dispute — is that oil is expensive, and that by all accounts the easy oil has already been found and is being extracted at a furious pace.

And this has led the industrial countries on a desperate search for this ever-scarcer commodity.

Russia, China, India, Brazil, Canada, Europe and the U.S. are fighting an anxious and diminishing struggle for the last of the world’s hydrocarbons. Russia is sending submarines to plant national flags at the bottom of the Arctic Ocean. China has moved aggressively to acquire oil holdings from Kazakhstan to Somalia. India has gotten in bed with the genocidal regime of the Sudan to the tune a $45 billion natural gas pipeline. The U.S. is spending trillions in treasury and thousands in lives to make sure the oil flows from the Middle East.

The Guardian of UK fame recently reported that “money is no object as the big players grab what is left of a diminishing resource.” (This was after China’s Sinopec paid $1 billion for the right to explore for oil in deep water off Angola.) Just a few years ago, such a deal would have sold for a mere $35 million. But competition is fierce over the last remaining frontiers where vast quantities of oil might be found.

Martin Spring in Money Morning UK reports on another Brazilian energy find:

The newly-discovered Sugar Loaf field under the Atlantic off Brazil, claimed to be one of the world’s biggest, is primarily a natural gas resource. The Shtokman development in the Barents Sea off Russia’s Arctic coast, and several projects off the coast of north-west Australia, focus on production of gas, not oil.

There is also increasing interest in exploiting hard-rock resources that have been neglected in the past because it’s difficult to tap their gas. On the western slopes of the US Rockies, Exxon Mobil is starting to employ an explosive fracturing technique three times more effective than conventional technology to unlock the riches of the Piceance Basin.

But if the prospects turn out to hold $6 trillion of petroleum, they’ll kick the emerging market into the premier league, making it one of the world’s ten largest oil producers.

“There are those who will tell you that oil is a cyclical business and a global fungible commodity,” says Christian DeHaemer in Taipan Daily.

It rises and falls with the business phase. If you look at a hundred-year chart, it is as obvious as a sidewinder on a sand dune. A sine wave through time — up and down in seven-year cycles.

But there are others who believe in the “Peak Oil” argument, the ultimate end-game, like a Suburban crushing a Subaru at the end of a long hill. Peak Oil enthusiasts will point to long lists of numbers, detailed maps of known reserves, past prognosticators of genius, and declare with tinfoil-hat fervor that “we are running out of oil.”

I’ve read these books and listened to the speeches. The idea that there is a finite amount of oil on the planet, and we are near the point where we will extract less in the next hundred years than we did in the past. Makes sense to me, as does the business cycle. I don’t know if the hundred-year history of the oil cycle is over. There is always a “this time it’s different” ideology at the peak. But then again, sometimes, it is different.

What we do know — what isn’t in dispute — is that oil is expensive, and that by all accounts the easy oil has already been found and is being extracted at a furious pace.

And this has led the industrial countries on a desperate search for this ever-scarcer commodity.

Russia, China, India, Brazil, Canada, Europe and the U.S. are fighting an anxious and diminishing struggle for the last of the world’s hydrocarbons. Russia is sending submarines to plant national flags at the bottom of the Arctic Ocean. China has moved aggressively to acquire oil holdings from Kazakhstan to Somalia. India has gotten in bed with the genocidal regime of the Sudan to the tune a $45 billion natural gas pipeline. The U.S. is spending trillions in treasury and thousands in lives to make sure the oil flows from the Middle East.

The Guardian of UK fame recently reported that “money is no object as the big players grab what is left of a diminishing resource.” (This was after China’s Sinopec paid $1 billion for the right to explore for oil in deep water off Angola.) Just a few years ago, such a deal would have sold for a mere $35 million. But competition is fierce over the last remaining frontiers where vast quantities of oil might be found.

Martin Spring in Money Morning UK reports on another Brazilian energy find:

The newly-discovered Sugar Loaf field under the Atlantic off Brazil, claimed to be one of the world’s biggest, is primarily a natural gas resource. The Shtokman development in the Barents Sea off Russia’s Arctic coast, and several projects off the coast of north-west Australia, focus on production of gas, not oil.

There is also increasing interest in exploiting hard-rock resources that have been neglected in the past because it’s difficult to tap their gas. On the western slopes of the US Rockies, Exxon Mobil is starting to employ an explosive fracturing technique three times more effective than conventional technology to unlock the riches of the Piceance Basin.

Not just coal though…coal seam gas. Black rock is the new black. Rock on.

We emailed our full wrap-up of the sector to our beloved Diggers and Drillers fraternity a couple of days ago. But the big-wig of the sector is Santos (ASX:STO).

Santos, after wooing several potential partners, has found a mate to invest in its LNG export terminal at Gladstone. Petronas, Malaysia’s state oil and gas investment vehicle, grabbed 40% of the project for AU$2.6 billion. Santos must have laid the woo on pretty thick.

But woo is an infectious disease in the hard asset sector these days. You have to wade through a viscous slurry of woo to get anywhere. Romance is blossoming…covetous, greedy-eyed romance. Everyone wants someone else’s stuff.

How else could Australia’s largest sugar producer make 38% of its revenues from building products…35% from aluminium…and just 19% from sugar? It’s been doing some whacky diversifying.

Whacky or not, Gabriel has caught the sweet scent of gains in CSR’s (ASX:CSR) chart. As usual, you’ll find him toiling away down at the bottom of the e-letter.

This new Santos story opens up another door for coal-seam gas producers. BG’s bid at the start of this month was like connecting a jumper lead for stocks with coal-gas. Petronas’ foray will shift share prices up a gear again. Two of the world’s largest LNG producers have thrown their back into Australia’s top-notch coal-seam gas reserves. If they play this right, the stuff should be whizzing out of port and up to China within a few years.

How good is that demand source though?

Huge Growth in LNG Demand

Well, latch your peepers onto this offering from ABARE. It shows you what LNG demand is capable of doing in the next few years. LNG is as good as any fossil fuel, but it’s one of the cleaner ones. So it’s getting top billing these days.

Growth just keeps popping up in the energy sector. A thought hit us late yesterday on the topic. We think the oil price is too hot to touch right at this instant. Further down the track, it’ll be a little cheaper.

But when it comes back a little, that doesn’t mean things go back to normal.

The current spike in oil prices tells you something. No-one has full control over the oil price. The purpose of OPEC in the first place was to keep oil between US$22 and US$28. Obviously it didn’t keep it there.

For almost five decades, Indonesia held a unique position as the only Asian member of the OPEC oil-exporters’ cartel. When it joined OPEC in 1962, it was Southeast Asia’s undisputed energy giant. But yesterday marked the end of an era for the country. Indonesia has formally withdrawn from the oil cartel.

You see, the country’s oil production hit a peak in 1976. And In the early 90’s it was still producing about 1.7 million barrels per day. But ageing oil fields and a lack of investment has seen falling production since 1995. The country now produces about 800,000 barrels per day and it’s been a net oil importer since 2005. Its days in OPEC were obviously numbered.

It’s big news in the oil industry, but I think that the country’s withdrawal from OPEC is really a bit of a non-event — at least from an investor’s point of view. Indonesia is still a major energy exporter. The country is the world’s biggest exporter of thermal coal, which is widely used in the power sector. It is the world’s second biggest exporter of liquefied natural gas (LNG) after the Gulf state of Qatar. And it has recently overtaken Malaysia as the world’s biggest producer of palm oil as well.

Global oil demand is expected to increase by 1.03 million barrels per day this year. And about 70 per cent of that additional demand is going to come from Asia. But it’s not just oil. Asia’s growing economies are fuelling demand for just about all forms of energy. And Indonesia is well placed to profit from it.

Coal is gold…

The country is sitting on about 90.5 billion tons of coal. And demand for the stuff is surging. In fact, Indonesian companies are now selling coal to Japanese buyers at double last year’s prices. So, investors have been flooding into the sector. Indonesia’s biggest coal miner, Bumi Resources, has seen its share price soar by about 431 per cent in the last year. Its market cap is now $16.4bn

Now the country’s second and third biggest coal miners are planning on floating on the markets as well. Number two producer, Adaro Energy, is planning a Rp12,000 billion ($1.3bn), public offering. That will make it the biggest IPO in Indonesia’s history. And it’s going to be the world’s 8th biggest IPO this year.

Adaro has already pulled in top international investors. 64% of the company is controlled by two Indonesian strategic investors. But 36 per cent of the shares are owned by major global investors, including Goldman Sachs, Citigroup and the Government of Singapore Investment Corporation.

And demand for the IPO has been huge. In March, the company announced that it planned to raise $500 million. Then, earlier this month, they raised that to about $1 billion…and then $1.3 billion…

The Adarco IPO is scheduled for next month. The country’s second biggest coal miner Indika Inti Energy plans on raising $300 million through selling an 18 per cent stake in an IPO shortly before the Adarco float. Both these IPOs are probably going to do well. Investors and speculators who missed out on Bumi Resources’ rally will probably try to get in early this time… a move I see as being quite sensible.

Bumi Resources is one to watch…

The two new coal IPO’s might take some of the wind out of Bumi’s sails. And if we see that happen, a fantastic buying opportunity will present itself.

Just consider: China is building new coal-fired power plants at a rate of about one per week! And then there is India. Asia’s other giant plans on adding more than 400,000 Megawatts of new capacity by 2030 — and the bulk of that is going to be powered by coal. So, the coal story still has a long way to go. In the months to come there could be moves to be made… and a second chance for anyone who missed out the first time around.

I’ll keep you posted.

Regards

Manraaj Singh
Profit Hunter
Editor

PS If you liked what you read here — you can become one of my regular subscribers and receive all our new Profit Hunter recommendations the moment we make them.

Source: Careful Timing Could Mean Big Profits From The Worlds No.1 Coal Exporter

Earnings season is, for the most part, developing into a credit crunch autopsy. It will take a heavy flow of good news and high trading volumes to breathe some life into the FTSE 350. Sadly this hasn’t materialised yet. In retail it’s particularly gloomy.

OK, this is very much a “work-in-progress”, but here’s a selection of some of the stocks we’ve been looking at lately. All three are UK based and UK listed. But each of them has an ‘international flavour’ — just what you need in your portfolio right now!

Earnings season is, for the most part, developing into a credit crunch autopsy. It will take a heavy flow of good news and high trading volumes to breathe some life into the FTSE 350. Sadly this hasn’t materialised yet. In retail it’s particularly gloomy.

Window on the world

We investors tend to get bogged down with stock stories closer to home. But zoom out and you will see opportunities all-over-the-shop, not just in retail.

Savvy stock pickers need to think global. By most estimates, real growth in trade this year will come from emerging markets. China, Russia, India… Our stock market is a window on the world, and this is where we will be focusing its energies as developed nations look a little tired.

Here are two other firms whose earnings results show good international exposure:

AVEVA (LSE: AVV)

Computer design firm AVEVA doubled its full year profits to beat analysts’ forecasts. Profits were £45m for the year ended 31st March, up from £24.7m the year before. Sales rose 34% for the period to £127.6m.

The group, which designs IT systems to help build oil rigs, ships and energy plants, said demand from these industries remains strong and is set to grow.

“Looking ahead, the board believes the outlook for the current year remains very positive for the business. The Oil and Gas, Power and Marine industries remain buoyant, driven by high commodity prices and strong underlying end-user demand,” said a spokesman.

Broker Cazenove reiterated its confidence in material upgrades for later in the year. “Today’s results demonstrate management’s ability to deliver profitable growth and demand levels that show no current signs of moderation,” it said.

Electrocomponents (LSE: ECM)

Distributor Electrocomponents reported a jump in profits and strong international performance and internet presence driving sales growth. Profits for the year to 31st March rose 9% to £95.4m from £87.2m in 2007. China led the way, with revenues up 35%.

North American and Asia Pacific revenues grew at 10% and 15% respectively. The Chinese market was the star performer, with revenues up 35%. UK revenues by comparison crawled 1% higher.

“This has been a successful year for the business with double digit headline profit growth, strong cash flow delivery, completion of the EBS implementation in Europe and the £10m cost reduction target being met,” said Ian Mason, group chief executive officer.

In the first eight weeks of the new financial year sales are up by about 2% year-on-year. This, however, masks a 2% decline in UK revenues; the international business has grown revenue by around 5%.

Just because the UK economy is struggling, doesn’t mean all UK businesses are. For superior returns, you want to identify companies with established profit streams deriving from growing, foreign markets.

Theo CaseySource: Burberry, a Passport to Profits

Well, I did some digging and found a couple articles that might help explain why…

The BBC reported late Thursday that Russia’s new president, Dmitry Medvedev, is headed to Kazakhstan. It’s his first stop on his first trip as the new president. And what’s first on the agenda? Oil.

K-stan exports most of its oil through Russian pipelines. That means a great deal of revenue for Medvedev and friends. We’ll see if K-stan signs a long-term deal with Russia or not, but you certainly can’t ignore Russia’s influence in the region.

Kazakhstan isn’t the only place Russia’s looking to boost revenue – and influence.

The Russian News and Information Agency, Novosti, announced, “Russian oil and gas companies are interested in developing the Mediterranean region.”

In fact, one Russian company has already bought a 50% stake in the El-Arish offshore concession agreement in Egypt.

Russia wants to consolidate its power over energy resources in Asia, and extend its influence in Western markets, too. I think these announcements are just the beginning, and you’ll start to hear more about investing in the Russian oil and gas industry.

Sara Nunnally

Source: Russia Up in a Sea of Red

“You think anyone who wasn’t actually hip deep in the new issues market day in and day out could dig up all that killer dirt, know all those names inside and out, and have such a strong roster of winning trading ideas week after week? Faking that level of expertise would be impossible. It’d be like pretending to be a PGA golfer or a five-star chef… The proof is right there in the pudding.”

Believe me, the trader behind Cash McDash is very real. And as Cash reveals this week, part of the secret to his information flow is “playing the game” — scratching the backs of his i-banker contacts so that they regularly scratch his back in return. The game can be rough at times, but the rewards are worth it… and you and I benefit by getting to ride shotgun on Cash’s info and expertise.

So without further ado, read on for this week’s peek into Cash’s world…

Warm Regards,

JL

JL: So, ready to get back to the action after that long holiday weekend?

CASH: You bet. Last week was pretty sobering, though… not only because of how the broad averages traded, but more specifically because of how the new issues market turned south.

JL: Right, you mentioned that late last week — the trouble brewing in IPO land. That discussion wasn’t on the record, though, so how about filling in the blanks for our readers?

CASH: Sure. To start with, our last on-the-record chat covered the shippers, and how the entire shipping sector had experienced broad strength. TBSI was poised to offer more stock to the public in order to raise capital, but there was some concern (from yours truly) about the shippers as a group being overextended and due for a pullback.

JL: And it looks like your concerns were validated.

CASH: Yup. That pullback in the shippers happened in a major way last week. It’s not surprising to see a white-hot sector give up some ground, but it was a bit surprising how fast it happened.

JL: So what type of exposure did you end up having? Hopefully you didn’t give up all of last week’s gains. I know you were pretty pumped about still making money despite all these curveballs being thrown at you.

CASH: Good risk management is a trader’s lifeblood over the long term, and I’ve had enough hard lessons to know to keep out of trouble. But yes, I did give up a little bit of ground. It put me slightly down on the week but a far sight better than what the S&P lost.

JL: So was TBSI a big part of the equation?

CASH: No, actually it was another shipper that got under my skin and stuck me with some red ink. This is a name that I had previously traded in and out of for a handsome profit. Picture a mature company, with an established business plan, that traded from below $50 to above $80 over the course of about eight weeks.

JL: Sounds like a nice move. What was the company?

CASH: Genco Shipping (GNK). The first time around was a nice win for me, but about two weeks ago I closed the position as the stock seemed to be getting ahead of itself.

JL: If you left the party early you must have booked some profit. How did you end up involved again this week?

CASH: Well, as you could probably guess, Genco issued more stock in a secondary, and I ended up getting a slug of it from my guy Marty at Morgan Stanley. (Marty not being his real name, of course. I always change the name — not to protect Marty, but to protect me.)

JL: Understood. So why did you take the stock from Marty? Or maybe I should ask first how much stock you took from Marty.

CASH: Well, I�m not going to give you specific numbers — just in case Marty or one of his friends read Taipan Daily — but I’ll tell you it was less than the number of Visa IPO shares he got me. Marty has a huge book of business, and because he generates a lot of commissions for Morgan Stanley, he often gets preferential treatment when it comes to getting good shares in hot demand.

JL: Sounds like a good guy to have on your team.

CASH: He certainly is. And he likes me. But one of the problems with having a big book of business is that he has a lot of clients begging him for the same deals that I want.

JL: Ah, competition. So you’re in a position where you need to endear yourself to him — stay in his good graces.

The Bureau of Labor Statistics (BLS) gave us some crazy numbers to chew on last week. For example, it said that gasoline prices decreased 4.6 percent.

It also said that the price for vegetables dropped 4.1 percent. Beef, veal, and coffee also cost less in April, according to the BLS.

It’s impossible to believe its numbers – that overall energy dropped 0.2 percent and food prices remained the same.

We all know that this can’t be true. The funny thing is, even the BLS admits it. There it is, in black and white, in its monthly Producer Price Index (PPI) report: the index for finished consumer foods climbed 5.2 percent … the energy goods index advanced 17.5 percent … and gasoline prices rose 3.2 percent.

The total increase for the core PPI (excluding food and energy) came to 3.0 percent.

But 3.0 percent was not the number you saw in the headlines last week. The number you saw was 0.4 percent. And the market was still taken aback. It was only expecting 0.2 percent – as in the previous month.

What’s going on here is seasonality. The government builds it into its employment and inflation numbers not to confuse us (though that is arguably the result), but to smooth out the numbers.

Let’s revisit gasoline prices. Why did the BLS say it decreased 4.6 percent when it really rose 3.2 percent?

Because last April and the April before that (the BLS actually goes back five years to compare prices), it rose even faster. In other words, this is the season (as we approach the heavy driving months of summer) when gasoline prices rise rapidly – every year.

Annualizing the 3.2 percent rise in April would give us an almost 40 percent rise for the year, but that’s overestimating what happens. Into the summer, prices usually fall back. There are other months earlier and later in the year when prices fall back. So the annual price increase ends up being much less than 40 percent.

Seasonality can lower “adjusted” price increases. But it can also raise them. For example, what happens if the price of gasoline doesn’t fall beginning in June – as it has done in prior years. If the price of gas just stays the same and doesn’t go up at all, the BLS will be reporting a hefty rise on the “adjusted” price of gas in June.

And if the real price of gas goes up? Then the seasonally-adjusted price could very well cause a panic over energy prices which will make last week’s outcry seem like a whimper.

And what goes for the PPI index also goes for the CPI index. The CPI index beat expectations for the month of April, but only because of adjustments made to the numbers based on seasonality. May’s numbers should also be held down by seasonality. But when June’s numbers are reported (that would occur in July), then all hell could break loose.

Seasonality also was a huge factor in making April’s unemployment numbers look good because a lot of new jobs are usually created in the spring. So the Labor Department added tens of thousands of “new” jobs into its final job count.

One of the sectors where it had new jobs expanding? The financial sector. With all the layoffs by the big banks, do you really think this is a sector seeing strong new job growth?

Without the Labor Department adding these presumed new jobs into its bottom line, instead of reporting “only” 20,000 jobs lost for April, the figure would have been well above 100,000, and you wouldn’t be hearing the pundits remark on how well the job market has been holding up.

The truth is, employment isn’t holding up well. And prices aren’t being held down too well. Mark my words. These employment figures will also be revised upwards. It seems the Labor Department conveniently forgot that we’re on the verge of a recession (actually, I believe we’re already in one).

What seasonality giveth, it will taketh away … come June. These very important inflation and job numbers will not merely slip. They could very well drop drastically. Wall Street won’t like that. If crude prices remain well above $100 by then (as I think they will), it will be damning evidence that the Fed couldn’t, after all, finesse its way out of the twin threats of no growth and rising inflation.

This is my contrarian take. While most economists and brokerages have been predicting a 2nd-half comeback for the economy, I believe it’s going to begin a major leg down. Depression/recession, crisis, runaway inflation, a new bear market, and Fed impotence will be Wall Street’s new battle cries. It won’t be pretty.

Good Trading,

Andrew Gordon

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Source: It Is the Season of the Bear