LALARRY

If You're A Financial Markets Geek Like Me (and maybe even if your're not)....

You will find this video quite funny.

It's also on youtube entitled Every Step Bernake Takes

The Anerican People, Their Leaders, The Media and Their Educators Speak Out on Oil Companies' "Outrageous Profits"

From the Los Angeles Times

Oil Firms Cast as Villains

As prices rise, motorists and politicians grow angrier. The industry feels misunderstood.

By Elizabeth Douglass
Times Staff Writer

April 27, 2006

Oil company earnings have never been sweeter. Stock prices are up. Shareholders are pocketing ever-bigger dividends. By nearly every measure, the petroleum industry is in its heyday.

But in the realm of public opinion, things could hardly be worse.

Motorists paying up to $3.50 a gallon for gasoline castigate oil companies and their executives with a growing list of high-octane epithets: Greedy. Un-American. The new robber barons.

On Wednesday, Sen. John McCain (R-Ariz.) invoked the harshest image yet. "I think they have the least PR sensitivity of any group outside of satanic cults," he said.

Responding to public outrage, the Senate Finance Committee on Wednesday asked the Internal Revenue Service to hand over the tax returns of the 15 largest oil and gas companies, saying they were concerned about excessive profit and outsize executive pay.

The news got even better — or worse — for the industry Wednesday with the news that Wall Street analysts expect the three largest oil and gas companies to report combined quarterly earnings of more than $16 billion, a 24% increase from last year.

Instead of celebrating their windfall, oil companies are battling demands for a tax on "windfall" profits, President Bush's call for an investigation into allegations of price gouging and mounting consumer resentment...

...Ron Perkins, a Blythe, Calif., resident who drives more than 23 miles to his prison guard job, said he saw a station's price jump 10 cents to $3.49 a gallon Wednesday. "It stinks … and their profit margin is outlandish," he said. "They're kicking consumers when we're down."...

Oil companies are flush because the price they get for each barrel of crude is rising much faster than the cost to extract it. In refining, profit margins are rising because the wholesale and retail prices for gasoline and diesel are far outpacing the additional costs of the resource they process.

In the end, the major oil companies can take solace in the fact that dozens of price-fixing investigations into the industry have come to naught and that public hatred does not amount to a criminal conviction.

Big Oil's top executives have appeared before congressional committees twice since the summer — once to explain the high prices that followed Hurricane Katrina and again in March to explain their record-setting 2005 earnings. Those included Exxon Mobil's $36.1-billion profit, the biggest ever at a U.S. company.(note that the profit margin not the gross profit number would be a sign of outrageous profits) ...

Exxon Mobil, based in Irving, Texas, is expected to post first-quarter earnings topping $9 billion.(actually it was 6 3/4% less than that) Industry analysts expect the company's full-year income to surpass the record set in 2005.

Analysts expect San Ramon, Calif.-based Chevron Corp., the nation's second-largest oil company, to report first-quarter net income of $4.1 billion on Friday. No. 3 ConocoPhillips of Houston on Wednesday reported profit of $3.3 billion.(again the gross number which is not reflective of the low margins of under 10%)

Michael Smith, a communications professor at La Salle University in Philadelphia, said the earnings could have "investors doing cartwheels…. For them, this is really good news," he said. "For everybody else, and for consumers especially, it's going to be another sign of greedy oil companies taking advantage of the little guys."

(Semi)Great Minds Think Alike....

As I was Saying (see previous post)....

NYT editorial today:

How Dare They Use Our Oil!

How's this for nerve? The leader of a country that consumes more than 20 million barrels of oil a day is warning the leader of a country that consumes some 6.5 million barrels not to try to lock up world oil resources. When President Bush welcomes the Chinese president, Hu Jintao, to the White House today, the American complaint will be that China's appetite for oil affects its stance on Iran, Sudan and other trouble spots.

In other words, China is acting just like everyone else: subjugating its foreign policy to its energy concerns. The United States does it, too — witness its long-running alliance with Saudi Arabia. ...

Still, the size of China's population — 1.3 billion people — puts things into an alarming context. China recently overtook Japan as the world's second-biggest consumer of oil. Its real gross domestic product is growing at 8 to 10 percent a year, .... China is expected to have 90 times the number of cars it had in 1990, and it will probably have more cars than America by 2030.

That leaves the world with two options. The first is to manage energy resources better. The other is to look for another planet. Simply continuing the current trends isn't viable, ...

None of this cooperation will work unless the United States provides leadership by making sacrifices of its own. Asking other countries to lay off the world's oil supply so America can continue to support its gas-guzzling Hummers doesn't really cut it.

So You Think Oil (and Your Gasoline) Prices Will Be Going Down Sometime Soon

Ponder This

Automobiles Per 1000 persons:

US: 826

China 15

Chinese GDP growth rate: 9% +

forecasted annual growth rate for car sales in china : 10 -15%, Current sales are 4- 5 million cars a year.

oh and :

India : 10 -12% growth rate in sales is forecast

Fuzzy Thinking on Illegal Immigrants

have no idea what to do about 11 million illegals in the us but i would say the following thinking is illogical

1. They are doing jobs no one wants to do . No, they are doing jobs no one wants to do for employers paying below min. wage, not paying payroll taxes, disability, often not following osha and other regs

2. The businesses would fold up/move abroad without the workers:

a. they would move overseas: since most of the workers are in construction and hospitality not too likely even true for agriculture

c Labor costs  would go up - yes but since everyone in the particular industry would see their labor costs go up, few would go out of business.

3. It would harm the economy through higher prices, - Some prices would go up but:

a. there will be new demand and economic activity caused by the higher paid legal workers that enter the workforce

b. the legal workers would pay taxes, keep their money in the US economy (vs. sending money back to reltaives back home etc)

both of the above quite positive for the economy

Actually some form of legalizing some of the people already here would create some of the same conditions as above.

Following Sean Hannity's advice of trying to round up 11 million illegals many with legal citizen children is about as logical as most of his rants.

Did you know Hannity is a multiple college dropout and former construction and dock worker ?

I Love Economists Because...

.... you can find one that will authoritatively cite any cause of an economic development one could think of.

case in point from the WSJ:

Share of People
Owning Homes
Is Leveling Off

For First Time Since 1994, Rate
At Year-End Hasn't Risen;
Weighing the Case for Renting

By RUTH SIMON (WSJ)
February 16, 2006; Page D1

After climbing steadily for a decade, the nation's homeownership rate appears to have leveled off....It's not entirely clear why the homeownership rate seems to have plateaued...

Demographic factors may also be a factor. Baby boomers are nearing the age where their homeownership rate peaks, says Doug Duncan, chief economist of the Mortgage Bankers Association. Recent immigrants are also less likely to own homes

That's interesting because what were 2 of the major factors economists, stock analysts (another credible group)of the homebuilding industry and speokesmen for the real estate industry (don't even ask how reliable those folk are) cited as fuelling a long term totally sustainable real estate boom:

1. Demographics: as baby boomers reach peak earning years they trade up in their first homes and purchase second homes as well.

2. Immigration : the upwardly mobile hispanic immigrant community are becoming first time homeowners injecting a powerful long term new demand factor in the housing market.

As Harry Truman said: I'm looking for a one handed economist. ...

Or a real estate industry person realistic about the prospects for real estate.

While You Were Working

The stock market fell around 2% today, and around 3% for the week. The news reports will mention "earnings disappointments" as a major reason.

I think it was much more because oil was up over $4for the week to $68.35 moving close to the $70 + level after Katrina. Blame that one on the Iran mess with Osama's latest video an added factor.

So:

Oil close to $70 which means gas headed to $3.00 again:

• Oil rich Venezuela in the hands of a virulently anti american semi nut case
• Oil rich Iran in the hands of a certifiable nut case
• Oil rich Saudi Arabia liable to have its oilfields or entire country taken over by Islamic extremists at a drop of a hat
• Oil rich Russia in the hands of a despotic leader
• Oil in Chad and Sudan that can't be exploited due to political turmoil
• Iraq unlikely to get its oil production going anytime in the foreseeable future
• China growing at 9%+ a year and cutting energy deals around the world

And our energy policy is to approve drilling in ANWR in order to get maybe 3% of our oil consumption in 20 years.

(semi) great minds think alike. Tom Friedman knows that we are rearranging the deck chairs on the titanic worryin about who gets elected to parliament in Iraq while we endanger our entire way of life through our lack of an energy policy.

He writes far better than I do. And his stuff is behind the TimesSelect firewall . So here's a nice excerpt from today's column:

if we continue to depend on oil, we are going to undermine the whole democratic trend that was unleashed by the fall of the Berlin Wall. Because oil will remain at $60 a barrel and will fuel the worst regimes in the world - like Iran - to do the worst things for the world. Indeed, this $60-a-barrel boom in the hands of criminal regimes, and just plain criminals, will, if sustained, pose a bigger threat to democracies than communism or Islamism. It will be a black tide that turns back the democratic wave everywhere, including in Iraq.

The one thing we can do now to cope with all four of these trends is to create a tax that fixes the pump price at $3.50 to $4 a gallon - no matter where the OPEC price goes. Because if consumers know that the price of oil is never coming down, they will change their behavior. And when consumers change their behavior in a big way, G.M., Ford and DaimlerChrysler will change their cars in a big way, and it is cars and trucks that consume a vast majority of the world's oil.

The more Detroit goes green, the faster it will be propelled down the innovation curve, making it more likely that Detroit - and not Toyota or Honda or the Chinese - will dominate the green technologies of the 21st century. A permanent gasoline tax will also make solar, wind and biofuels so competitive with oil that it will drive their innovations as well.

George Bush may think he is preserving the American way of life by rejecting a gasoline tax. But if he does not act now - starting with his State of the Union speech - he will be seen as the man who presided over the decline of our way of life. He will be the American president who ignored the Sputniks of our day

Thanks For Nothing Prof Mankiw !

For 2 years ending in Feb 2005 Professor Gregory Mankiw of Harvard served as head of the President's Council of Economic Advisors. There despite writing in his Economics textbook that the idea that tax cuts could be self financing due to the economic activity (and thus tax revenues) they would generate had no basis in fact.

Yet in Washington he parroted the party line of continued tax cuts, telling the public and Congress that tax cuts combined with some relatively modest cuts in spending would prevent any dangerous growth in the budget deficity. He never broached the idea of any kind of targeted taxes or a comprehensive energy policy.

Now that he doesn't speak truth to power and is ensconsed back in his Cambridge Ivory Tower he tells us what he really thinks on some economic matters in the form of a WSJ Op Ed. While it is quite logical and well thought compared to bulk of articles on the page, one would have hoped some of those views would have come while Mankiw was sitting in DC. One would hope that behind closed doors some of the ideas would have been broached. I sincerely doubt it.

Some of his New Year's Resolutions for policymakers:

This year I will be straight about the budget mess. I know that the federal budget is on an unsustainable path. I know that when the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. I know that the choices aren't pretty -- either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. I am going to admit these facts to the American people, and I am going to say which choice I favor.

of course when in DC Mankiw told us significan t tax cuts and revenue cuts of less than 5% of the budget and the massive new entitlement program in the form of the prescription drug benefit did the trick

This year I will admit that there are some good taxes. Everyone hates taxes, but the government needs to fund its operations, and some taxes can actually do some good in the process. I will tell the American people that a higher tax on gasoline is better at encouraging conservation than are heavy-handed CAFE regulations. It would not only encourage people to buy more fuel-efficient cars, but it would encourage them to drive less, such as by living closer to where they work. I will tell people that tolls are a good way to reduce traffic congestion -- and with new technologies they are getting easier to collect. I will advocate a carbon tax as the best way to control global warming. Because we may well need to raise more revenue (see resolution no. 1), I'll always be on the lookout for these good taxes."

needless to say such heresy never left the good Professor's lips as head of the CEA In fact in his letter of resignation

Mankiw concludes with this, doubtless what got the WSJ to publish the piece:

This year I will be modest about what government can do. I know that economic prosperity comes not from government programs but from entrepreneurial inspiration. Adam Smith was right when he said, "Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice." As a government official, I am not going to promise more than I can deliver. I am going to focus my attention on these three goals -- peace, easy taxes, and a tolerable administration of justice -- and I am going to trust the creativity of the American people to do the rest.

Of course the above is a bit of a plattitude. In just the two paragraphs I cited he noted the need for some new taxes and advocated government policy to decrease energy consumption and improve the environment.

One assumes the Professor would like the student loan program to continue, along with the national science foundation and the national institutes of health so that grant money will keep flowing to Harvard. And I'm sure he wouldn't mind a Fulbright fellowhip to spend a year abroad either. Somehow I also think he sees a role for medicaid,public schools and maybe even an improved healthcare system.

so things are not so simple

Thanks for stepping up when your views could be easily heard by policymakers Professor Mankiw.

4": This year I will admit that there are some good taxes. Everyone hates taxes, but the government needs to fund its operations, and some taxes can actually do some good in the process. I will tell the American people that a higher tax on gasoline is better at encouraging conservation than are heavy-handed CAFE regulations. It would not only encourage people to buy more fuel-efficient cars, but it would encourage them to drive less, such as by living closer to where they work. I will tell people that tolls are a good way to reduce traffic congestion -- and with new technologies they are getting easier to collect. I will advocate a carbon tax as the best way to control global warming. Because we may well need to raise more revenue (see resolution no. 1), I'll always be on the lookout for these good taxes."

needless to say such heresy never left the good Professor's lips as head of the CEA In fact in his letter of resignation

Mankiw concludes with this, doubtless what got the WSJ to publish the piece:

This year I will be modest about what government can do. I know that economic prosperity comes not from government programs but from entrepreneurial inspiration. Adam Smith was right when he said, "Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice." As a government official, I am not going to promise more than I can deliver. I am going to focus my attention on these three goals -- peace, easy taxes, and a tolerable administration of justice -- and I am going to trust the creativity of the American people to do the rest.

Of course the above is a bit of a plattitude. In just the two paragraphs I cited he noted the need for some new taxes and advocated government policy to decrease energy consumption and improve the environment.

One assumes the Professor would like the student loan program to continue, along with the national science foundation and the national institutes of health so that grant money will keep flowing to Harvard. And I'm sure he wouldn't mind a Fulbright fellowhip to spend a year abroad either. Somehow I also think he sees a role for medicaid,public schools and maybe even an improved healthcare system.

so things are not so simple

Thanks for stepping up when your views could be easily heard by policymakers Professor Mankiw.

Happy New Year- Some Thoughts On the Economy

I'll do this in two parts: a general analysis of the economic situation and then another post on the investment climate.

Those denizens of the WSJ Op Ed page both in the pages of the newspaper and  with whiz kid Stephen Moore's distortions on CNBC's Larry Kudlow program (god bless ex Clinton Secy of Labor Robert Reich for trying to get the truth in while both Kudlow and Moore talk over him) keep expressing wonderment that people don't realize how "good" the economy is.

Interestingly I thing the financial markets, so beloved as arbiters of truth by Wall Street's newspaper of record have got things pretty much correct the stock market was essentially unchanged this year and the bond market reflects no large scale economic growth on the horizon. More on the markets in the next post.

The WSJ writes:

Less than a year ago, we labeled the current U.S. expansion the "Rodney Dangerfield economy" -- because it "gets no respect." Today our now $12.5 trillion economy has only maintained its strength even as it still gets disparaged in the media, which continues to fret about the fragility of what has undeniably been a resilient expansion. There are a few policy lessons here, assuming Washington is awake. The 3.5% to 4% rate of growth in 2005 has been especially remarkable given eight Federal Reserve Board interest rate hikes, oil prices as high as $70 a barrel, and one of the most devastating natural disasters in American history. Yes, fourth quarter GDP may come in softer thanks to limping auto sales, but the entrepreneurial U.S. economy will still have grown at about twice the pace of Old Europe in 2005

• That economic growth number of 4%. I fail to see the wonderment at having a decent level of economic growth when you shoot the economy full of a keynesian triple bang of tax cuts, deficit spending and spending on a war. With a large and growing budget deficit (due to some quirks due to one year tax breaks and the amt it didn't grow this year but no one doubts it will) and a record trade deficit. No one could doubt that the economy could grow at a decent rate.

The question isn't whether that will pull up economic growth but who is going to pay for it later. If your neighbor built an extension on their home and had a new benz, beemer and porsche in his driveway it would look like he/she was doing real well economically. Until you found out it was all done on borrowing.

• I have to dig around for an estimate of the number, but part of the GNP growth, I would estimate  around .5% comes from the energy industry. When EXXON delivers the same dallon of gasoline at a price 60% above last year's it shows that 60% increase as an increase in GNP. But no new jobs were created, nor were there new goods produced in the economy. It's simply a wealth transfer from consumer to oil company.

• From a strictly GNP point of view Katrine will increase GNP. When the tragedy strikes and homes are destroyed  there is nothing subtracted from GNP. The loss in GNP comes from the lower economic activity in the immediate area. But most of the people are working and generating economic activity elsewhere, government and private assistance while not adequate is generating economic activity and it will continue to do so.This doesn't mean lifes and livelihoods haven't been tragically destroyed, it just means that the impact on GNP is not necessariy negative. On a net basis, the large scale reconstruction of an area will add to  GNP. Done right it will even add more.

• The comparison with Europe is ridiculous, are economies are totally different and it has never been our benchmark,

Most importantly, as Timoth Harford points out in his highly recommended (far better than Freakonomics) and highly accesible Undercover Economist, few economists look solely at GDP as a measure of an economy. The well being of the people, accessibility to basic services, level of employment are all relevant.

onward with the WSJ

The great American jobs machine has averaged a net increase of nearly 200,000 new jobs a month this year. Some 4.5 million more Americans are working today than in May of 2003, before the Bush investment tax cuts.

a couple points. Most people generally use the "headline" unemployment number from the bureau of labor statistics. The most recent number for that is 5%. But if you did into the statistics you find that that number does not include the following:

Total unemployed plus marginally attached workers plus total employed part time for economic reasons

 Total unemployed, plus all marginally attached woret

workers,                                                                         
      plus total employed part time for economic reasons, as a                                                                         
      percent of the civilian labor force plus all marginally                                                                          
      attached workers........................................    

    NOTE:  Marginally attached workers are persons who currently are neither
 working nor looking for work but indicate that they want
  and are available for a job and have looked for work sometime in the
 recent past.  Discouraged workers, a subset of the marginally
  attached, have given a job-market related reason for not currently 
looking for a job.  Persons employed part time for economic
  reasons are those who want and are available for full-time work but 
have had to settle for a part-time schedule.  
  


Total when including all of the above 8.7%

There is one other factor to continue. The number is derived from a payroll 
survey and a household survey. In the household survey someone literally 
goes door to door asking about the working age members of the household.
 I would venture a wager that those surveyors assigned to go door to door
 in a rough poor neighborhood fill out some of those surveys at a starbucks
 in a more comfortable neighborhood. But I could be wrong. i do know that
 among the upper middle class professionals that have been laid off that 
I know, few would tell a survey interviewer they were unemployed. 
"i'm starting an independent consulting practice would be the more 
likely answer. Although he would likely jump at the first job with 
a steady salary he found. In other words they would never show up in the stats 
as among the unemployed.

wsj again:

The employment expansion in financial services, software design,
medical technology and many other growth industries dwarfs the smaller
job losses in the domestic auto industry.

From the BLS numbers November job data release. Job growth Nov 2004 - Nov 2005

financial services: 13,000
software design 5,000
Food Services and Driking Services : 38,500 (largest of any category)

I doubt too many of the above are good paying jobs with career potential.


This job growth has been accompanied from 2001 to 2005 with the best
rate of labor productivity over any four-year period since the Labor
Department started tracking this statistic. This productivity
revolution augurs well for higher wages in 2006.

There they go again....Labor productivity from 2001 -2005 was the best 
in hitory but real wages went up 1.1%. Well, the productivity
gains created profit increases well in excess of 1.1%. So
all the gains brought by productivity went to the shareholders
(including the execs with all those stock options). Nothing
at all wrong with the shareholders making money...but next
to nothing went to the workers. So why in the world would
one expect productivity gains to lead to gains in earnings
in 2006 ? It hasn't been the case before.

 BTW for you laymen:
productivity means output per worker. If you lay off one worker
and you get two other guys to pick up his workload: that means
you have increased productivity by 33% (2 workers doing the
work previously done by 3). I'm not saying it's always wrong
just pointing out what 's behind the numbers.




last one from now from our friends at the WSJ:

The real gains for families have been in the value of their assets. In
2005 Americans owned an all-time high level of wealth (mostly housing
and stocks), valued at $50 trillion, according to the Federal Reserve
. Median household net worth is now estimated at more than
$100,000. Rather than being overloaded with credit card bills, the
truth is that Americans' assets are rising in value faster than they
are taking on debt.

As Secy Reich (height around 4'7") take the median heigh of him and Shaquille 
O'neil and you get to 6' .

I checked their source (i like to do that ) 75% of the gain in net worth 

over the five year period came from real estate. Take a look at where

the big jumps in real estate have occurred and who has benefitted

and let me know if the number is a good reflection of the wealth of

the avergage American. That's what a "median" average often gives you.

real estate. Take a look at where the big jumps in real estate prices have been and

you can get a good idea where all the growth in net worth has been - hardly spread across the economy.

 period came from

. But : whether you believe we are in for a real estate
crash or not, everyone with a brain knows the annual double digit increases
are over. Since the average American carries fairly significant credit card
debt and $500 billion in home equity has been monetized in loans last year
alone I am hardly as sanquine as the WSJ editors. I wouldn't count
on that household equity number to keep the economy going.

Add in that sinking feeling when the average american reads about
the healthcare and pension benefit crises, the fact that everyone
knows at least in their heart that they are never going to see gas
below $2.00 for any considerable period of time in the future and 
that $3.000 is far more likely than $1.70, and the building trade and
budget deficits and things don't look quite as rosy as they would have us
think.

The denizens of the WSJ generally feel there is a message in the
markets. There is a reason the US stock market was virtually unchanged
in 2005. More on that in the next post.





WSJ:

Critics of the U.S economic model charge that income gains for workers
still have not caught up with the losses from the 2000-2001 high-tech
collapse. Now they have. The Treasury Department reported last week
that "real hourly wages are up 1.1% versus the previous business cycle
peak in early 2001." Workers are now earning more per hour in real
terms than they did at the height of the 1990s expansion.

I found their source, a two paragraph press release from

I found their source, a two paragraph press release from the Tres Dept,
 with no data supplied. But nobody uses the Treasury Department data 
to keep track of changes in real earnings, they use the

Bureau of Labor
statistics(BLS) which compiles the stats. And I don't know about you but 
I don't know anyone that measures their economic well being vs, 
the way things were in 2001.

From the most recent BLS press release:(my bolds)

"Average weekly earnings rose by 3.2 percent, seasonally adjusted, from 
November 2004 to November 2005.  After deflation by the CPI-W, average weekly 
earnings decreased by 0.4 percent.  Before adjustment for seasonal change and 
inflation, average weekly earnings were $551.00 in November 2005, compared with 
$532.22 a year earlier."

 Remember the above number uses CPI which EXCLUDES energy costs.
 Suffice it to say the drop in real earnings is more severe relative 
to the real costs people face.For example through November the CPI is measured at 2.1%

annually, if you include energy it is 3.5%. So an increase in real wages

of 1.1% above the CPI would be equal to a zero wage gaing including energy costs. BTW over the same period health care costs went up 4.6%. 

Additionally, take another look at the number they trumpet : an increase 
in real hourly wages of 1.1% sinc 2001. For example through November
Think the editorial page writers would be all smiles when their boss
 told them to be happy : their salary has gone up 1.1% 

above inflation over 5 years ? 

too much here, to be continued...