NYT: US Prodcers Cut Rigs

Good article in the New York Times which shows how the current drop in the price of oil is affecting US oil producers.

Some interesting excerpts.

The first one shows just how much production has dropped and how it can affect employees working for these companies.

As for the industry, the signs of retraction are clear. The nation’s rig count, a barometer of oil exploration and production activity, fell by 26 in the week that ended Jan. 2, following a drop of 16 the week before, according to the Baker Hughes service company.

Mr. Triepke predicted that over the next six months, the big three land drilling companies — Helmerich & Payne, Nabors Industries and Patterson-UTI Energy — are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ.”

Layoffs might not come immediately however:

Even with the reductions, though, large-scale layoffs across the industry are not expected, at least not immediately. Producers contract their rigs for as long as three to four years, and many companies have hedges that lock in higher prices than the going market rates. In addition, producers often need to drill simply to retain their leases or keep their revenue up.

The final excerpt shows just how many people are directly affected by the drop in crude. 

Nationwide, the oil industry employs about a million people, including extraction, pipeline construction and refining, and the boom has added about 150,000 industry jobs over the last three years, according to Citi Research.

The affects of lower oil will not affect employees working for these oil companies only.  It will hurt the new restaurants, bars, grocery stores, etc. that have opened to accommodate all of these people. 

The Rising Inequality in America

The rising inequality in America is becoming more and more of a problem.  How can we have a prosperous and thriving economy if wealth is concentrated at the top?

CBO finds that, between 1979 and 2007, income grew by:

• 275 percent for the top 1 percent of households,
• 65 percent for the next 19 percent,
• Just under 40 percent for the next 60 percent, and
• 18 percent for the bottom 20 percent. 

The share of income going to higher-income households rose, while the share going to lower-income households fell.

• The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
• Most of that growth went to the top 1 percent of the population.
• All other groups saw their shares decline by 2 to 3 percentage points.

Fed Tapers QE by $10B

What was expected happened.  The Fed cut rates by $10B/ month.

As Ben Bernanke said:

Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet.”

 According to Bloomberg Bernanke said:

 "The steps that we take will be data dependent,” Bernanke said. “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases. If the economy slows, the Fed could “skip a meeting or two,” and if the economy accelerates it could taper a “bit faster,” he said.

 As for borrowing costs:

 At the same time, the Fed reinforced its assurances that it’s a long way from raising borrowing costs, saying that its benchmark rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

 

Industrial production Rose Reaching an All Time High

A little late in posting this but it is a huge sign that the manufacturing sector in this country is recovering nicely.

The report was summed up nicely by Bill McBride in his blog Calculated Risk.

Capacity Utilitzation is still 1.2% below the average for the last 30 years but seems to be climbing.

Industrial production increased 1.1% in November to 101.3 and at a new record high.

In addition, it seems like there is some manufacturing strength in Europe according to a Bloomberg article.

The charge higher is led by the auto sector.  Per Bloomberg article:

The production of motor vehicles and parts increased 3.4 percent after falling 1.3 percent in October, today’s report showed. Auto assemblies climbed last month to an 11.6 million annual rate, the most since June 2006. Excluding autos and parts, manufacturing rose 0.5 percent, indicating the pickup was broad-based.

 This is a great report but we need to pay attention to inventories to see if this will have legs to stand on.  Again per Bloomberg:

The outlook for production depends on whether demand is strong enough to keep pace with an increase in stockpiles. A report last week showed business inventories climbed 0.7 percent in October, the biggest jump since January.

Some charts for our viewing pleasure per Calculated Risk.

The Costs of too Low a Minimum Wage III

Another good article in Bloomberg View by Barry Ritholtz making the argument for a rise in the minimum wage.  This time he takes on Walmart.

Some excerpts:

 McDonald's recently found itself in the spotlight courtesy of its “McResource” line -- the company help line that helps its poverty-level, full time employees enroll in various welfare programs. A recording of that McResource line sparked outrage, driving this issue into public view.

More recently, Wal-Mart’s holiday public-relations headache began when a Canton, Ohio, store decided to hold a food drive for needy local families for the holidays. What made this a PR nightmare was that the needy families were full time Wal-Mart employees who were working in the store holding a food drive.

 And more to the point:

Why, I keep asking myself, do we effectively want to subsidize a private company’s employees? Wouldn’t it make much more sense to raise the minimum wage to a level that a full-time worker could support the average American family of four? Just $11.33 puts a 40-hour employee over the poverty line. The costs of this increase would be borne by the company and its consumers -- not the taxpayer.

Core Logic Report on Properties Returning to Positive Equity

Core Logic reported today that 791K properties Returned to positive equity.

The numbers are as follows:

• Nearly 6.4 million (13.0%) Mortgaged Properties are still underwater.
• The national aggregate value of negative equity decreased $33.7B to $397B at the end of the third quarter.  this improvement was driven by rising home prices.
• Under-equitied borrowers (less than 20% home equity) account for 20.4% of the 48.9M residential properties with a mortgage.
• Near-negative equity (less than 5% home equity) account for 3.2% of the 48.9M residential properties with a mortgage.
• Average loan to value is 61.4%
• Negative equity residential properties are underwater by 33%
• 82% of homes valued at $200K or less have equity vs. 92% for homes above $200K

The Costs of Too Low a Minimum Wage II

Another article I found on TBP related to the subsidies large corporations receive when keeping their wages way too low.

The target of this paper is Walmart.

Walmart

The Costs of Too Low a Minimum Wage

Interesting piece in Bloomberg View today by Barry Ritzholtz on how the US taxpayer subsidizes large and very profitable corporations due to the very low minimum wage.

Here are some excerpts:

Here’s where things get interesting: A full-time worker (40 hours per week) in the U.S. making minimum wage earns only $15,080 per year. For some context, median individual earnings are $40,404 per year (BLS), while the US poverty level is $23,550 (HHS). Full-time minimum wage earners make 62.7 percent less than median income and are 36.0 percent below the poverty level. (The number you probably hear quoted most often is median household income at $51,017, according to Census. The minimum is 70.4 percent below that).

 If the minimum wage had merely kept up with price inflation since 1968, than it would currently be at $10.77. That is $22,401.60 per year, bringing wages closer to the poverty line. Beyond inflation, if it kept pace with productivity increases, it would be closer to $20 per hour; annual salary would be $41,600, higher than the U.S. median. And just for laughs, if the minimum wage kept up with the earnings of the top 1 percent, it would be higher than $22, or about $45,760.

He closes by saying:

 As someone who does not especially care for fast food -- I worked in a McDonald's in high school, and lasted less than a weekend -- I do not support my tax dollars subsidizing large and profitable companies. Raising the minimum wage to $11.33, the poverty level, effectively shifts the cost of eating greasy French fries and over-cooked burgers from tax-payers to fast food consumers -- where they belong.

 Interesting stuff.

Is the US Economy Turning Around?

With all of the talk about the Fed tapering, you would think that all is doom and gloom in the US economy but is this really the case?

A strong argument can be made that the consumer seems to have made significant progress in de-leveraging after the housing and debt crisis.



The chart above shows the net worth of households and non profit organizations.  Rising net worth is a strong positive for the economy as the more secure one feels financially the more likely he will spend.  The problem with the above chart lies in the fact that net worth may not be an accurate picture of what is happening in the middle class.  Afterall, the big gains in net worth have occurred to shareholders who have taken a nice ride on the Fed liquidity train over the last few years. 

With this in mind, one has to look at Household Income.  This is a better indicator of whether the lower and middle classes are going to have the means necessary to contribute to the economy.  The picture seems a bit more bleak when looking at the chart below.



As you can see, the labor market has not been too kind to workers for quite some time now.  David Rosenberg, who is an excellent economist for Gluskin Sheff, seems to think that we are about to turn the corner and enter a period of rising wages.  As he says in the Financial Post in his latest piece:

Since the pool of available labour is already shrinking to five-year lows and every measure of labour demand on the rise, one can reasonably expect wages to rise discernibly in coming years, unless, that is, you believe the laws of supply and demand apply to every market save for the labour market.

 Let’s get real: By hook or by crook, wages are going up next year (minimum wages for sure and this trend is going global).

 With this in mind, the most fascinating statistic this past week was not ISM or nonfarm payrolls, but the number of times the Beige Book commented on wage pressures: 26. That’s not insignificant. Again, when I talked about this at the Thursday night dinner, eyeballs rolled.

In addition to the promising signs for the consumer.  As shown in the 5 year chart below, it also seems like state governments have put their books in order and are beginning to spend again on things like infrastructure.



One of the most important events that will help the economy is the bipartisan budget agreement which, if passed, will keep the federal government open for the next two years and allow many business owners the opportunity to focus on increasing sales as opposed to the scoundrels in Washington.

In addition to this the federal government has also done a great job reducing it's deficit as shown below:



So the economy seems to be turning around and getting it's act together.  This is why the Fed seems prepared to start it's tapering measures and one would think that it would help the market continue it's torrid pace up.  This may not be the case however, as the market may not have the strength to continue it's rise.  Again according to David Rosenberg:

In a nutshell, I feel like 2014 is going to feel a lot like 2004 and 1994 when the economy surprised to the high side after a prolonged period of unsatisfactory post-recession growth. Reparation of highly leveraged balance sheets delayed, but, in the end, did not derail a vigorous expansion.

 That by no means guarantees a stellar year for the markets, because, as we saw in 2013 with a softer year for the economy, multiple expansion premised on Fed-induced liquidity can act as a very powerful antidote. Plus, a rising bond-yield environment will at some point provide some competition for the yield delivered by the stock market.

 While 1994 and 2004 were hardly disasters, the market generated returns both years that were 10 percentage points lower than they were the prior year even with a more solid footing to the economy — what we gained in terms of growth, we gave up in terms of a less supportive liquidity/monetary policy backdrop.

The bottom line is that nobody knows what the market will do but things do seem to be pointing up for the economy in 2014.