"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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The information presented in this blog and its individual articles is provided for informational use only and should not be considered investment advice or an offer for a particular security. The contents reflect the views and opinions of the individual writer as of the date the article was written and do not necessarily represent the views of the individual writer on the current date. They also do not in any way, shape, or form represent the views of the Firm Never-To-Be-Named. Any such views are subject to change at any time based upon market or other conditions and The Great Redoubt and its individual writers disclaim any responsibility to update such views. These views should not be relied on as investment advice, and because investment decisions for any security are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any contributor to The Great Redoubt. Neither The Great Redoubt nor any individual author can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.

Thursday, February 3, 2011

By Popular Demand: Oil Sands

Oil sands are beginning to show up more and more on the radar of investors with an interest in commodities. But what are they?
Wikipedia defines oil sands as: "Bituminous sands - colloquially known as oil sands (and sometimes referred to as tar sands) - are a type of unconventional petroleum deposit. The sands contain naturally occurring mixtures of sand, clay, water, and a dense and extremely viscous form of petroleum technically referred to as bitumen (or colloquially "tar" due to its similar appearance, odour, and colour). Oil sands are found in large amounts in many countries throughout the world, but are found in extremely large quantities in Canada and Venezuela."
Bitumen is, or course, "a mixture of organic liquids that are highly viscous, black, sticky, entirely soluble in carbon disulfide, and composed primarily of highly condensed polycyclic aromatic hydrocarbons".
So that's nice and all. But why do investors care?
Well, because you can process the bitumen out of the bituminous sands. And then you can process the bitumen in similar fashion to crude oil, producing most of the same products that you can get from crude oil (gasoline, plastics, fertilizer, and so forth). The Athabasca oil sands of Canada are already producing about 1.1 million barrels of crude bitumen per day, and some projections estimate that this will be up to 4.4 million barrels by 2020.
There are, of course, some problems with this. Bitumen just does not go "as is" to crude oil refineries. It has to be mined first (unlike crude oil, which you can just pump out once you have the well in place), and this often involves strip mining. It also has to be pre-processed (aka upgraded), which goes through the following stages:
  1. remove water, sand, physical waste, and lighter products
  2. catalytic purification by hydrodemetilisation, hydroesulfurization, and hydrodenitrogenation
  3. hydrogenation through carbon rejection or catalytic hydrocracking.
All of this is expensive, of course. And much more of an energy hog than drilling and pumping. And it can generate anywhere from 10% to 45% more greenhouse gasses than conventional crude oil production. Even a decade ago, this wasn't really worth it.
That was, of course, a decade ago. Rising crude oil prices have made the oil sands much more competitive now. And, from a US perspective, they're also safer sources of crude oil than the Middle East[1]. After all - and let's be serious here - Canada is far less likely to dissolve into civil war than any given nation in the Middle East at this moment.
And why are Canadian oil sands so popular right now? Well, while a lot of countries have oil sands, only Canada and Venezuela have enough oil sands to make them commercially viable at this time. The US could deal with Venezuela[2], but we don't exactly have the best relations with that nation[3]. So Canada it is.
Is any given company that works oil sands a good investment? I'm not going to make a recommendation[4], but here are a few things to keep in mind, however:
  • Producing oil from bituminous sands is expensive. This means that oil sand companies produce less revenue per barrel than traditional oil companies.
  • The expense of producing oil from bituminous sands also means that they are far more vulnerable to fluctuations in the price of crude. If peace suddenly breaks out in the Middle East, or if OPEC decides to reduce its target price for oil (or increase production quotas), this could also have a negative impact on the profits of the oil sand companies.
  • If you have concerns about the environment, production of oil from oil sands makes the production of oil from traditional oil wells look like a green alternative energy.
  • Even if you don't have concerns about the environment, a lot of people do. Some of those people are writing laws. Some of those laws are aimed at capping and/or taxing greenhouse gas emissions. Taxes will cut into revenue, and caps on emissions could reduce production (or require the purchase of additional emissions under a "cap and trade" system, which then cuts into revenue).
So do your homework, and make sure you understand what you're buying and why you're buying it. Don't just buy something because some guy on TV throws a chair and screams "buybuyBUY!" That will most likely end in tears and the color red.
[1] Canada already produces as much crude from their oil sands as flows through the SUMED pipeline on a daily basis.
[2] Currently ruled by President Hugo "I blamed the Haitian earthquake last year on United States scalar weapon tests" Chavez.
[3] "I hereby accuse the North American empire of being the biggest menace to our planet," is one of the nicer things he's had to say about the United States.
[4] So you can put the baseball bats down, Compliance.

Non-Economic News

There is a report out from researchers at Indiana University indicating that President Obama's goal of getting 1 million electric cars on US roads by 2015 may not happen. Why? Consumers, that's why. The average car-buying individual is concerned about the cost of electric cars vs. how far you can drive one before you have to recharge it, how easy it will be to recharge, and what sort of resale market there is.
Unimpressed by President[1] Saleh's statements yesterday that he will not seek reelection[2] in 2013, the "Day of Rage" protests have started in Yemen. So far, it's a pretty peaceful Day of Rage - there was "a large crowd of government supporters"[3] nearby, but things remained peaceful. So far.
Speaking of pro-government counter-protests, it turns out that the pro-Mubarak protesters that turned out in Cairo yesterday were in the pay of the government. Some were plain clothes police officers, others were soldiers. They are, interestingly enough, also the ones that provoked the violence yesterday after Mubarak announced he would not run for reelection[4] in September. A spokesman for the Interior Ministry claimed that all of the police identification cards were stolen or fake. CNN's response is "But state television reporting Wednesday did not always match CNN's own observations of what was happening in Tahir Square." The Egyptian government has restored internet access to the nation, though.
In good news for the US, Standard & Poor's has stated that they do not have any plans to downgrade the US sovereign debt rating. They feel that our credit risk is similar to Japan's (which Moody's cut last week), but they do not feel it is as serious.
[1] Read: Dictator-For-Life.
[2] Read: he might not actually shoot anyone who expresses a desire to run against him, and he might not direct his rubber stamp parliament to declare him president again.
[3] Read: a large group of soldiers and political appointees who got orders to show up.
[4] Read: once again exercise emergency powers to direct the parliament to declare him president again, and imprison anyone who speaks out against him.

Productivity And Costs And First Time Jobless Claims

This is looking to be a morning full of economic measures. Coming out at 8:30 AM EST we have the big boys on the Street, First Time Jobless Claims and Productivity and Costs. Then, at 10 AM EST, we have the ISM Non-Manufacturing Index and Factory Orders.
As far as First-Time Jobless Claims are concerned, we had a miserable week last week. Initial jobless claims hit a seasonally adjusted 454,000 for the week ending 1/22. For the week ending 1/29, there does seem to be a little optimism (possibly driven, in part at least, by yesterday's pretty good jobs reports from ADP and Challenger), and we're looking at a consensus expectation of 425,000.
So, was the optimism of the analysts justified? According to the US Department of Labor, their only failing was that they were not optimistic enough. On the down side, the initial jobless claims figures were revised upwards to 457,000 (not so good). But then, the seasonally adjusted initial claims for the week ending 1/29 came in at 415,000 - beating expectations by 10,000. Meanwhile, the seasonally adjusted insured unemployment level fell to 3,925,000 - a nice decline from the previous week's revised level of 4,009,000.
The unadjusted figures are 459,683 new jobless claims (still down 26,633 from last week) and an insured unemployment level that increased 5,274 to a level of 4,619,319. 25 states saw first-time claims fall by more than 1000, and only 4 states saw claims increase by more than 1000.
In a word: not bad[1]. The markets should be happy about this.
Then, looking at Productivity and Costs, Q3 2010 saw a 2.3% increase in nonfarm productivity, and a 0.1% decrease in unit labor costs. For Q4 2010 the analysts are expecting the exact same thing - a 2.3% increase in nonfarm productivity and a 0.1% decrease in unit labor costs.
Much as was the case with First-Time Jobless Claims, the Bureau of Labor Statistics is telling us that the analysts weren't optimistic enough. Nonfarm labor productivity increased 2.6% in Q4 2010, driven by a 4.5% increase in output and a 1.8% increase in hours worked. meanwhile, unit labor costs decreased by 0.6%, driven by the fact that the increase in productivity (up 2.6% as we just saw) outpaced the increase in average hourly compensation over the same time (up 1.9%).
So we're off to a good start. Now, if the Middle East can keep from descending into anarchy and bloodshed, maybe the markets will be up today.
[1] Yeah, I know. "Not bad" is two words. Here's another word: "so what'?

Wednesday, February 2, 2011

SEC Green-Lights "Historic" Arbitration Rule

View this article on our website: SEC Green-Lights ‘Historic’ Arbitration Rule

SEC Green-Lights ‘Historic’ Arbitration Rule

In what is being hailed as an historic change to the securities arbitration process, the SEC has approved a rule that allows investors to choose only public arbitrators to hear and decide their claims against brokers.

Previously, in cases with three arbitrators (those involving claims over $100,000), the panels have been made up of two public arbitrators and one “non-public” arbitrator — somebody with a connection to the securities industry. Finra proposed the rule in October after a 27-month pilot program that allowed certain investors the option of having only public arbitrators hear their cases. Under the new rule, investors can still choose to have a non-public arbitrator on the panel.

“For us, this is really pretty historic,” says Linda Fienberg, president of the Financial Industry Regulatory Authority’s dispute resolution program. “It’s the most historic of the rule changes we have done since I got to Finra in 1996.”

Some, but not all, investor advocates have criticized the arbitration process for being unfair. They note that many investors at least perceive arbitrators as being biased, largely because Finra, which manages the arbitration forum, is sponsored by the brokerage industry.

Finra says it believes giving investors the ability to have an all-public arbitration panel “will increase public confidence in the fairness of our dispute resolution process,” according to a press release announcing the SEC’s approval of the rule.

Fienberg says that “non-public,” or industry-affiliated, arbitrators can include registered individuals or attorneys or accountants who represent the industry. Public arbitrators can be anyone with five years of financial or business experience and can cover such professions as high school teachers, journalists, engineers and doctors.

Investors participating in the pilot program chose the option of all-public arbitrators about 60% of the time. Investors also frequently opted to use a non-public arbitrator, but the ability to choose between the two options improved their perception of the process, Finra says.

Among the 20 awards issued by all-public panels under the pilot program, investors were awarded damages in 13 of 19 cases, or 68%. The parties settled the remaining case.

Of all the cases that were decided by arbitrators in 2010, 47% awarded damages to investors, up from 43% in 2005.

“So far the data show that customers are prevailing more often with an all-public panel, but there just aren’t enough awards to have any significance yet,” says Fienberg.

Only 22% of investor claims were decided by arbitrators last year. About 60% were settled and the rest were withdrawn or resolved in other ways.

Ryan Bakhtiari, who represents investors in arbitration claims and is a partner at Aidikoff, Uhl & Bakhtiari, says the new rule is a big step toward leveling the playing field for investors in securities arbitration.

He likens the inclusion of non-public arbitrators on securities arbitration panels to doctors' deciding medical malpractice claims.

“Today, customers have a choice,” says Bakhtiari. “It’s a big structural change.”

While Bakhtiari praised Finra for the change, he says that the self-regulatory organization needs to go a step further and tighten the definition of "public arbitrator." There are “too many industry types that are creeping their way into the public pool,” he says. “There are loopholes that need to be closed.”

There are currently 3,521 public arbitrators and 2,808 non-public arbitrators, according to Finra’s website. Finra added arbitrators across the board in recent years, in part because it anticipated making the option of an all-public panel permanent after the pilot program, says Fienberg.

Finra pays public and non-public arbitrators an honorarium of $200 per hearing session.

Finra also faced a shortage of arbitrators in the South in the wake of hundreds of claims filed against brokers by investors in several Morgan Keegan bond funds.

“We have more than enough arbitrators even if all of the investors were to choose an all-public panel,” says Fienberg.

Results of the pilot program suggest that one potential drawback of having an all-public panel is the arbitrators take longer to decide claims. Pilot program cases with all-public panels took about two months longer to wrap up than the claims decided by panels with one non-public arbitrator (this includes both those cases that were part of the pilot program and those that were not).

Some in the industry are concerned about arbitrators’ level of knowledge.

“My view is that arbitration panels are better informed about the securities industry if there is an industry arbitrator, and having an industry arbitrator doesn’t create any lack of fairness because that person is only one of three arbitrators on a panel and cannot control the outcome,” says Hardy Callcott, partner at Bingham, in an e-mail response to questions.

Industry observers also note the possible connection between the SEC’s speedy approval of Finra’s proposed rule and the Dodd-Frank mandate that the SEC conduct a review of securities arbitration. The law gives the SEC the power to prohibit mandatory pre-dispute arbitration clauses in agreements between brokers and clients. Nearly all broker-dealers currently require their customers to sign a mandatory arbitration clause, meaning those customers must settle disputes through Finra rather than in court.

There is no deadline on the SEC’s review of securities arbitration.

Jill Gross, professor of law at Pace University School of Law, says the SEC review meant Finra could not justify a non-public arbitrator on all three-arbitrator panel cases.

“I predict that the SEC’s Dodd-Frank study of Finra arbitration will now conclude that this latest reform enhances the fairness of the forum,” writes Gross in a law blog post. “As a result, the SEC will refrain from prohibiting mandatory securities arbitration.”

Fienberg says the new rule has been a long-term goal for Finra and has nothing to do with the SEC’s review of securities arbitration.

The new rule applies to all investor cases requiring a three-arbitrator panel in which arbitration lists have not been sent as of Jan. 31.

News That Isn't Economic Data

Most Asian stock markets will be closed on February 3 and 4 for the Lunar New Year. China's markets (except for Hong Kong) will be closed on February 7 and 8 as well.
Egyptian President Mubarak's promise not to seek reelection in September hasn't really impressed protesters. Pro-Mubarak and anti-Mubarak forces got together in Cairo last night and beat the blood out of each other. The army and police forces were present, but chose not to get involved.
The Egyptian situation is sending ripples throughout the Middle East. The nation voted most likely to have a dictator - excuse me, President - sneak out of town in the middle of the night with the nation's gold supply is Yemen. President Ali Abdullah Saleh[1], who has spent more than than thirty years in power, has announced that he will not seek re-election when his current term ends in 2013, and he also won't simply vote for his son to replace him[2]. A planned series of protests named "The Day of Rage" may have had something to do with that. King Abdullah II bin al-Hussein of Jordan[3] has fired his government and appointed a new prime minister in the face of protests.
Australia, home of roughly half of the poisonous animals in the world, is being reminded that nature simply does not approve of human occupation of the island continent. With the floods finally beginning to recede[4], the category 5 cyclone Yasi (with winds gusting up to 183 mph) is getting ready to come ashore in Queensland..Yes, the same Queensland that is currently underwater. The Australian Weather Bureau is warning that the "impact is likely to be more life threatening than any experienced during recent generations". Torrential rains and a storm surge of up to 2 meters above the usual high tide line are expected.
{1] Who didn't so much "get elected president by the will of the people" as "brutally seize power in a military coup, murder the sitting president, and execute 20 of the officers that supported him to consolidate power". There are regular elections in Yemen, though. If, by "election", you mean "the regular murder of anyone who opposes President Saleh".
[2] Under the Yemen system of "one man, one vote". President Saleh is The Man, and he has The Vote.
[3] Who took power in 1999 when his father died of perfectly natural causes. Legitimate natural causes. Not natural causes in the sense that it is perfectly natural to die when you are tied to a stake by the army and shot several dozen times.
[4] And with the rumors of sharks swimming through flooded city streets turning out to be just that - rumors. Visually exciting as that would have been, to people who aren't in Queensland.

Jobs And Mortgages

That's what's going to be driving the futures around this morning, at least as far as economic data is concerned. Jobs and mortgages.
So let's start off with the mortgages. The Mortgage Bankers Association has released it's Weekly Mortgage Applications Survey, which has a name that is reasonably self-explanatory. The current release is for the week ending 1/28, and has the Market Composite Index up 11.3% on a seasonally adjusted basis. The Refinance Index (again, self-explanatory) was up 11.7%, while the Purchase Index (which looks at brand new mortgage applications) was up 9.5%. Refinancing represented 69.3% of the total applications filed for the week, and the average 30-year fixed-rate mortgage was 4.81%.
And now, jobs. First, we have the Challenger Job-Cut Report, issued by Challenger, Gray & Christmas[1], which tracks layoffs by region and industry. the February report indicates that employers announced plans to cut 38,519 jobs in January. This is an increase from December's 32,004 layoffs, but it is also the lowest January total on record - the average layoffs in January are 104,560. Drilling in, we see that:
  • The government and non-profit sector led the charge, with 6450 planned reductions in staff (up substantially from December's 3276 job cuts). Furthermore, there are no indications that there will be a turnaround in the trend in 2011.
  • The retail sector was second with an announcement to cut 5755 jobs. this is also up from December's 4937, but significantly down from January 2010 (16,737 layoffs). Challenger, Gray & Christmas see this as a sign of a rebound in the retail sector.
  • California had the most layoffs (4848), followed by Illinois (4078), North Carolina (3465), Michigan (2604) and Iowa 92216).
Moving on to a report that gets a little more attention, ADP has also released its January 2011 National Employment Report. First off, they revised the December employment figures downward from an increase of 297,000 to an increase of only 247,000. January saw an employment increase of only 217,000. That looks weak, but it substantially beats the average employment gain over the last six months (which was only 52,000 per month). Drilling in to the report:
  • Employment in the service sector rose by 166,000 (the twelfth consecutive month of gains for the sector), while the employment in the goods-producing sector rose 21,000 (the third month of consecutive gains) and employment in the manufacturing sector rose 19,000 (also the third consecutive month of gains).
  • Construction employment fell 1000. Financial services employment gained 3000.
  • Large business employment increased by 11,000. Medium-size business employment increased 79,000. Small-size business employment increased 97,000.
None of these are going to shove the market around too much on their own, but the aggregate effect of both the mortgage gains and the improvement in the employment situation should help boost the futures. Also, it seems to point towards good results for tomorrow's First Time Jobless Claims, and Friday's Employment Situation Report.
[1] Who, now? According to their website, Challenger, Gray & Christmas are "the nation's first, oldest, and premier outplacement organization". And what is an outplacement organization? A company that assists "downsizing" companies[2] in helping former employees through the transition to new jobs. So it could be argued that they have their finger on the pulse of the layoff rate in the US.
[2] That is, companies laying people off.

Tuesday, February 1, 2011

And Now, By Popular Demand, Why Is The Market Up?

A few factors seem to be contributing. First and foremost, everyone seems to have liked the ISM Manufacturing Index report, with its happy-fun heart-warming "every part of this report is showing positive numbers" results. That, and nobody seems to care about construction spending.
On top of that, we're starting to see signs that Egypt will not dissolve into a round of civil war and mass murder. Egyptian President[1] Hosni Mubarak announced in a speech that he will step down at the next election, which everyone (including himself) hopes will calm the civil unrest. Whether he follows through remains to be seen.[2]
A few other things. Pfizer beat expectations for revenue and, since they're both up substantially and part of the Dow, that has a positive boost on the market. UPS also beat expectations, as did Baidu. British Petroleum announced that they lost a bucket of money[3] last year, to nobody's surprise, so that didn't really hurt them at all.
[1] This is an... interesting title he has. He became President in 1981, after Egyptian President Anwar Sadat was assassinated by Egyptian army officers. President sort of implies elections. Elections are not really something President Mubarak has had to suffer through. Technically, he had to stand for election in 1987, 1993, 1999, and 2005. The first three of those, however, were handled by referendums put forward and voted on by an Egyptian parliament that is typically described as a "rubber stamp" - no other candidates need apply. The 2005 election was the first Western-style election he ever faced, where he won reelection thanks to the support of unregistered and/or dead voters. The distinction here between "President" and "brutal dictator" seems to be "does the United States see you as an ally".
[2] Pro tip: He probably won't. Unless he does so from the airport, with the nation's supply of gold bullion safely spirited away.
[3] A 190,120,055 gallon bucket, at that.

Sales And Manufacturing Data To Warm The Cold Winter Market

Well, we hope the sales and manufacturing figures will warm the market, anyway.
First, we have the ICSC-Goldman Store Sales figures, which is a "weekly measure of comparable store sales at major retail chains". It specifically focuses on general merchandise - about 10% of total retail sales - so it isn't a huge market mover. Nevertheless, it never hurts to keep an eye on even the little details. Everything adds up. For the week ending 1/29/2011, the rate of change in store sales tracked by the index increased by 20 bps, to close at a -1.0% decrease in sales. For the rolling year, store sales are up 1.6% (a decline of 120 bps from the previous week).
There's no link for the ICSC-Goldman Store Sales original data, because they want a paid subscription.
Next, we have the Redbook, which is "a weekly measure of sales at chain stores, discounters, and department stores". So it tracks slightly different things from the ICSC-Goldman Store Sales. Interestingly enough, though, it's showing similar figures as the ICSC-Goldman report: rolling year sales for the week ending 1/29 are down 50 bps to a 1.8% increase.
Again, the Redbook report wants a paid subscription. So no link.
Taken together, the two reports indicate quire strongly that retail sales are slipping. Keep an eye out for the official retail sales report when the Census Bureau releases it on February 15 - it may very well be disappointing.
Next up is the Institute for Supply Management's Manufacturing Index. In December, the overall index was at a level of 57.0%, and the consensus expectation is that it will rise to 57.5%. The actual figures, as reported on the ISM web page, are even better. The index has hit 60.8%, its highest level since May 2004 and the sixth consecutive month of month-over-month growth. Drilling in to the report:
  • New Orders are up 580 bps to 67.8%. The industries reporting new orders growth are petroleum & coal products, primary metals, computer & electronic products, transportation equipment, wood products, machinery, fabricated metal products, miscellaneous manufacturing, chemical products, paper products, electrical equipment, appliances & components, and food, beverage & tobacco.
  • Production is up 50 bps to 63.5%.
  • Employment is up 280 bps to 61.7%
  • Exports are up 750 bps to 62.0%
  • Imports are up 450 bps to 55.0%
Finally, construction spending. November saw a 0.4% increase in construction spending, and the analysts are expecting that to slow to only a 0.2% increase in December (yes, there is a full month worth of lag on this lagging indicator). And what does the Census Bureau have to say about that expectation. They laugh, laugh I say, in the face of the analyst's expectations. Constructions spending actually decreased at a rate of 2.5%. Private construction sank 2.2% for the month, while public construction sank 2.8%.
In summation? Last week was all right for retail sales, although they show signs of slowing. December was good for manufacturers, terrible for construction. The Street will most likely be relatively happy with these results. Except for that part of the Street that invests in construction.

Monday, January 31, 2011

Why Are The Markets Freaked Out By Egypt?

It's a good question, right? Why are the markets - particularly the US markets - worried about the current unrest in Egypt? After all, it's a fairly small country that stopped being a major player in international politics round about the time that Augustus Caesar made it the personal property of the princeps, and it only really achieved any contemporary international importance with the completion of the Suez Canal. It's not like we're on day seven of riots and protests over the government in China, after all[1].
I'm not going to profess to have all the answers here, but this will at least give you some information to work with.
First off, there is the Suez Canal, through which passes about 7.5% of the world's sea trade[2]. If the Suez Canal were to shut down - say, if there were open civil war in Egypt - that 7.5% of the world's sea trade would have to round the Cape of Good Hope[3] instead of taking the nearly straight-line 120 mile canal route between the Indian Ocean and the Mediterranean Sea. Rest assured that this would cost shipping companies (and, by extension, companies that use the shipping companies, which would then get passed on to wholesalers, then to retailers, then to consumers) far more than the current average $250,000 per ship that it costs to traverse the canal.
Along with the Canal there is the SUMED Pipeline, which carries roughly 1.1 million barrels of crude oil per day north from the Red Sea to the Mediterranean Sea. If that pipeline were shut down, that oil would either not go anywhere, or would have to go by ship around the Cape of Good Hope. Now, since the average supertanker can hold about 2 million barrels, so that doesn't seem too bad at first glance. But, since that would require another 180 or so supertankers rounding the Cape of Good Hope each year (each one burning petroleum in their own right), that starts ramping up the cost of oil in the blink of an eye. And that's assuming none of those tankers experience any problems[4].
But that's just part of the problem. Have a look at current private foreign investments in Egypt. There are four major western oil companies operating in Egypt (BP, Eni, Apache, and the BG Group), 11 western banks (Barclays, BNP Paribas, HSBC, Societe Generale, Bank Audi, BLOM Bank, Citibank, Credit Agricole, Intesa Sanpaolo SpA), MashreqBank, and Piraeus), a major European retailer (Carrefour), two western telecoms (France Telecom, and Vodafone), and a major western manufacturer (Nestle). In the event of a civil war erupting, many (if not all) of those companies would pull out, which would have a brutal impact on the Egyptian economy and a substantial impact on the companies.
Interestingly enough, Egypt's current troubles are also reflecting on perceptions of risk for investments in Saudi Arabia. Both nations derive primary revenue streams from oil production, have aging heads of state, and deep social divisions. They aren't identical by any means - Saudi Arabia has far more wealth, for one thing - but they're similar enough for Egypt to provide a prototype of what could happen in Saudi Arabia. Also, since Vodafone caved in to Cairo's demands to cut internet service in Egypt, that has analysts concerned about whether or not other ISPs would do the same under political pressure from other nations.
Also, and this is purely speculation on my part, civil war in Egypt could escalate into a broader regional war. If a broader regional war starts, then Israel (which borders Egypt and has fought a war with Egypt less than 50 years ago) will get dragged in. If that happens, all bets are off.
[1] That we know of, anyway.
[2] About 10% of that sea trade is oil tankers.
[3] This adds about 6000 miles to the distance traveled.
[4] Also, the SUMED Pipeline is only currently running at about half of it's 2.5 million barrels per day capacity. If that picks up, that would be one supertanker every day.

Personal Income and Outlays

Today, we're getting a look at Personal Income and Outlays, which tracks several things: the rate of change in personal income, the rate of change in consumer spending, and the rate of change in the costs of a fixed basket of goods and services[1]. In November, Personal Income increased 0.3%, consumer spending increased 0.4%, and the core PCE price index increased 0.1%. Anticipating December, the analysts are looking for personal income to increase another 0.4%, consumer spending to increase 0.5%, and core PCE price index to increase only another 0.1%.
Now, what does the Bureau of Economic Analysis have to say about these predictions? First and foremost, personal income was up 0.4% (meeting expectations), consumer spending was up 0.7% (beating expectations) and core PCE price index increased less than 0.1% (also beating expectations). that in and of itself should market he markets happy, but let's drill down a little into the report.
First off, let's define a concept called "real income". Investopedia defines "real income" as "the income of an individual group after taking into consideration the effects of inflation on purchasing power. For example, if you received a 2% salary rise over the previous year and inflation was 1%, then your real income only rose 1%. Conversely, if you received a 2% raise in salary and inflation stood at 3%, then your real income would have shrunk 1%."
What does this have to do with the price of tea in China? Well, the BEA figures indicate that real disposable income increased only 0.1% in December (down from the 0.2% increase from November), and real consumer spending[2] was up 0.4% (up from November's 0.2%). The real disposable personal income and real personal consumption figures are indexed against the value of the dollar in 2005, so you can get a sense of how much the dollar has devalued itself just in the past 5 years..
The rate of personal savings (which is calculated as disposable personal income minus personal outlays, on the reasonable assumption that if you aren't spending the money you must be saving it in some fashion) increased to 5.2% of disposable personal income in December (down from November's 5.5%).
The PCE Price Index[3] increased 0.3% in December.
Durable goods purchases increased 1.0% in December (up from November's 0.2% decrease), nondurable goods purchases increased 0.3% (as compared to November's 0.3% increase).
In summation, then: despite my personal pessimism about "real" income and outlays vs. "current dollar" income and outlays, December was a solid month. The markets can (or, at least, should) look to this as a positive sign. Particularly for investors in durable goods manufacturers, because these also tend to be the big ticket high cost items.
[1] In the "don't get me started" category, this typically looks at a "core" fixed basket of goods and services. Highly volatile items are, as always, excluded.
[2] If you've pulled up the BEA report and are playing along with the home game, this is consumer spending is Personal Consumption Expenditures on the report. Anything labeled "Chained (2005) dollars" is what is considered "real" for these purpose
[3] Not the "core" PCE Price Index .