Don’t Get Ruined by These 10 Popular Investment Myths

Don’t Get Ruined by These 10 Popular Investment Myths (Part II)
Interest rates, oil prices, earnings, GDP, wars, terrorist attacks, inflation, monetary policy, etc. — NONE have a reliable effect on the stock market

By Elliott Wave International

You may remember that during the 2008-2009 financial crisis, many called into question traditional economic models. Why did the traditional financial models fail?

And more importantly, will they warn us of a new approaching doomsday, should there be one?

That’s a crucial question to your financial well-being. This series gives you a well-researched answer.

Here is Part II; come back soon for Part III.


Testing Exogenous-Cause Relationships from Economic Events
By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)

Claim #2: “Rising oil prices are bearish for stocks.”

This is a ubiquitous claim. It would take weeks to collect all the statements that economists have made to the press to the effect that recently rising oil prices are “a concern” or that an unexpected (they’re always unexpected) “oil price shock” would force them to change their bullish outlook for the economy.

For many economists, the underlying assumption about causality in such statements stems from the experience of 1973-1974, when stock prices went down as oil prices went up. That particular juxtaposition appeared to fit a sensible story of causation regarding oil prices and stock prices, to wit:

Rising oil prices increase the cost of energy and therefore reduce corporate profits and consumers’ spending power, thus putting drags on stock prices and the economy.

Figure 7 shows, however, that for the past 15 years there has been no consistent relationship between the trends of oil prices and stock prices.

Sometimes it is positive, and sometimes it is negative. In fact, during this period it has been positive for more time than it has been negative! And the quarters during this period when the economy contracted the most occurred during and after the oil price collapse of 2008. Thereafter oil prices doubled as the economy was reviving in 2009. None of this activity fits the accepted exogenous-cause argument.

But wait. Could rising oil prices perhaps be bullish for stocks?

Yes, once again we can argue both sides of the exogenous-cause case. Consider: As the economy begins to expand, business picks up, so stock prices rise; and as business picks up, demand for energy rises as businesses gear up and operate at higher capacity. That’s why stocks and oil go up together. Makes sense, doesn’t it?

But neither claim explains the data. Sometimes oil and stocks go up or down together, and sometimes they trend in opposite directions. As with stocks and interest rates we discussed in Part I of this series, we could easily isolate examples of all four pairs of coincident trends.

To conclude, we can determine no consistent relationship between the two price series, and no economist has proposed one that fits the data.

This graph negates all the comments from economists who say that an “oil shock” would hurt the stock market and the economy. It also throws into doubt the very idea that stock prices and oil prices are linked.

(Stay tuned for Part III of this important series, where we examine another popular investment myth: Namely, that “Rising U.S. trade deficit is bad for the economy stocks.”)


Free Report:
“The Biggest Lie in Stock Market History”

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How to Cripple the U.S. without firing a shot

We talk a lot about Peak Cheap Oil as the Achilles’ heel of our nation’s exponential monetary model, but the real threat to the quality of our daily lives would be a sustained loss of electrical power. Anything over a week without power for any modern nation would be a serious problem.

When the power goes out, everything just stops. For residential users, even a few hours begins to intrude heavily as melting freezers, dying cell phones, and the awkward realization that we don’t remember how to play board games nudge us out of our comfort zone.

However, those are just small inconveniences.

For industrial and other heavy users, the impact of even a relatively short outage can be expensive or even ghastly. Hospitals and people on life-assisting machinery are especially vulnerable. Without power, aluminum smelters face the prospect of the molten ore solidifying in the channels from which it must be laboriously removed before operations can be restarted.

Many types of nuclear power plants have to switch to back-up diesel generators to keep the cooling pumps running. And if those stop for any reason (like they run out of fuel), well, Fukushima gave us a sense of how bad things can get.

And of course banking stops, ATMs are useless, and gas stations cannot pump gas. Just ask the people of New Jersey in the aftermath of Hurricane Sandy.

A blackout of a few hours results in an inconvenience for everyone and something to talk about.

But one more than a day or two long? Things begin to get a bit tense; especially in cities, and doubly so if it happens in the hot mid-summer months.

Anything over a week and we start facing real, life-threatening issues. National Geographic ran a special presentation, American Blackout, in October 2013 — it presented a very good progression covering exactly what a timeline of serious grid disruption would look and feel like. I recommend the program for those interested.

Grid Threats

We’re exploring this risk because there are a number of developments that could knock out the power grid for a week or more. They include a coronal mass ejection (CME), a nuclear electromagnetic pulse (EMP) device, a cascading grid failure, and malicious hacking or electronic attacks.

It’s the cyber-electronic front that’s especially concerning these days, as we depend so vitally on so many systems that operate completely dependent on computer controls.

Many critical manufacturing and power generation systems are especially vulnerable to such attacks, as the Stuxnet virus showed in Iran where it is believed to have ruined thousands of delicate uranium enrichment centrifuges by overriding their commands and causing them to literally spin themselves to pieces.

One member recently wrote:

My great fear is not supersonic missiles, it’s a combined-arms cyber attack plus (as necessary) kinetic assault on the power grid, with the “calling card” being left pointing to some convenient domestic extremist group scapegoat.

The FERC (Federal Energy Regulatory Commission) released a report that suggested the US power grid could be knocked out for “weeks if not months” by taking out only 9 substations using a coordinated kinetic attack.

Given that one substation was actually assaulted by persons unknown last year [18]:

In last April’s attack at PG&E Corp.’s Metcalf substation, gunmen shot 17 large transformers over 19 minutes before fleeing in advance of police. The state grid operator was able to avoid any blackouts.

The Metcalf substation sits near a freeway outside San Jose, Calif. Some experts worry that substations farther from cities could face longer attacks because of their distance from police. Many sites aren’t staffed and are protected by little more than chain-link fences and cameras.

So this power station assault actually happened. This whole thing isn’t just someone’s crazy dream.

You can be certain that such concerns are very high on the list of things that the NSA worries about, and which it feels justify the use of whatever electronic eavesdropping may be necessary to guard against.

A widespread loss of the electrical grid for even one week would be devastating for a number of reasons. First the fuel refining, manufacturing, distribution and delivery systems would cease to function. After emergency generators are used to move and distribute what processed fuel is in the system, are only remaining fuel will be that brought into the country from other regions of the world.

Within a very short time, perhaps just days or hours of what is perceived to be a sustained loss of electrical power, the fuel system will be placed under emergency triage rationing — with hospitals, nuclear generation plants, the military, police and other emergency services consuming 100% of what’s available. Sorry, none for you.

With every additional day that the electricity is out the damage to the afflicted nation mounts.  Food, fuel, and water, become scarce and sanitation problems rapidly  accumulate.

Here’s the thing: cyber penetrations and outright kinetic attacks on US power grid elements have already happened. Given the extreme disruption that would result from any successful future attacks, you should have some personal preparations in place.

Our Woeful Grid

The US power grid, as a whole, is anything but modern and robust. Huge swaths of it were built decades ago. It remains largely a centralized generation and distribution system, one in which the failure of a remarkably few ‘nodes’ would be catastrophic.

It’s millions of miles of lines, utility poles, towers, substations and generating stations. Here’s a good, short description:

Today [2003], the US electric power grid serves about 125 million residential customers, 17.6 million commercial customers, and 775,000 industrial customers. These various categories of customers account, respectively, for about 37%, 36%, and 27% of electricity consumption annually.

Electricity is produced at large power plants typically located in remote areas and delivered into high-voltage transmission lines that transport it across long distances to regional and neighborhood substations, where the voltage is stepped down to a current that can be used in homes and offices and fed into a local distribution grid.

Between 1949 and 1973, electricity use in the United States grew at an average annual rate of 8.3%, and the system was able to meet that demand with only sporadic difficulty. Even with rising prices after 1973, electricity use grew at an average annual rate of 2.5% in the years from 1973 to 2006. The growth rate projected for the next 20 years is comparatively flat.

The electric grid encompasses both transmission and distribution (T&D) power grids. The transmission system spans more than 160,000 miles (257,000) of high-voltage transmission lines and connects over 750 GW of electricity-generating capacity with local and regional demand centers across the nation. In addition, the electricity distribution system, which consists of smaller, lower-voltage distribution lines that deliver power from substations and transformers to customers, encompasses 6 million miles (9.6 million) of wire and cable spread across roughly 500,000 circuits and linked to the national transmission system by about 60,000 substations.

The-Grid

The substations circled in green in the image above are the most vulnerable points in the system.

The alternative to this mass of interconnected wires would be a decentralized, smart grid involving a very large number of small generating ‘stations’ where thousands of failures would be required to cause a sustained loss of power for millions.

But currently?

The loss of just nine critical substations could mean a catastrophic loss of power for up to 18 months. What the country would look like after that, and whether such an insult could be recovered from is an open question.

U.S. Risks National Blackout From Small-Scale Attack

The U.S. could suffer a coast-to-coast blackout if saboteurs knocked out just nine of the country’s 55,000 electric-transmission substations on a scorching summer day, according to a previously unreported federal analysis.

The study by the Federal Energy Regulatory Commission concluded that coordinated attacks in each of the nation’s three separate electric systems could cause the entire power network to collapse, people familiar with the research said.

A small number of the country’s substations play an outsize role in keeping power flowing across large regions. The FERC analysis indicates that knocking out nine of those key substations could plunge the country into darkness for weeks, if not months.

A memo prepared at FERC in late June for Mr. Wellinghoff before he briefed senior officials made several urgent points. “Destroy nine interconnection substations and a transformer manufacturer and the entire United States grid would be down for at least 18 months, probably longer,” said the memo, which was reviewed by the Journal. That lengthy outage is possible for several reasons, including that only a handful of U.S. factoriesbuild transformers.

Electrical-Grid-WSJ

 

The Us grid consists of three big regions, and is designed in such a way that the failure of just a few critical components would drag the whole thing down.

Again, that insult could be a deliberate attack, an EMP device, a CME, or even a squirrel on the wrong transformer  on a hot day that leads to a cascading series of failures.

These vulnerabilities could be addressed, but the main point of this report is to note that over the years since they’ve been identified they mostly have not been addressed.

Does all of this seem too unlikely to worry about? Well, you might want to consider that we only recently learned that a massive CME narrowly missed the earth in 2012, the exact sort of threat we covered in great detail in a past podcast with a NASA scientist:

Carrington-class CME Narrowly Misses Earth

May 2, 2014

The close shave happened almost two years ago. On July 23, 2012, a plasma cloud or “CME” rocketed away from the sun as fast as 3000 km/s, more than four times faster than a typical eruption. The storm tore through Earth orbit, but fortunately Earth wasn’t there. Instead it hit the STEREO-A spacecraft. Researchers have been analyzing the data ever since, and they have concluded that the storm was one of the strongest in recorded history. “It might have been stronger than the Carrington Event itself,” says Baker.

The Carrington Event of Sept. 1859 was a series of powerful CMEs that hit Earth head-on, sparking Northern Lights as far south as Tahiti. Intense geomagnetic storms caused global telegraph lines to spark, setting fire to some telegraph offices and disabling the ‘Victorian Internet.” A similar storm today could have a catastrophic effect on modern power grids and telecommunication networks.

How much did this storm miss us by? About one week. If the earth had been just 7/365 (1.9%) further along in its path, an entire hemisphere would have gotten shellacked. And, oh by the way, do any of you recall hearing of any warnings from NASA or other government bodies in 2012 that such a blast was headed our way and how closely it missed us by?

Me neither. So perhaps we shouldn’t count on getting an official warning in the future either.

You should be at least moderately prepared for a sustained electricity outage, at least to the same degree that you carry fire insurance on your property. Both are remote — but catastrophic — events where a little advance preparation can go a long way.

  • Evidence that shows malicious attacks on the US grid have been attempted multiple times
  • The low level of integrity in the current grid’s defenses
  • A checklist of backup systems in the home level every concerned citizen should work to have in place

U.S. Slashes Marcellus Shale Reserves

It is getting hard to believe the government’s energy reserve estimates, at least as they apply to America’s “100 years of natural gas” from shale.

The United States Geological Survey (USGS) just issued a report estimating that the Marcellus Shale contains undiscovered natural gas resources of about 84 trillion cubic feet (TCF). That is one-fifth of the original estimate.

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The Energy Information Agency (EIA) had previously said in their Annual Energy Outlook 2011 that the United States has 827 trillion cubic feet of recoverable shale gas overall, and about 410 trillion cubic feet (nearly half of total reserves) of that gas is in the Marcellus shale. Bloomberg reported on the conflicting assessments in U.S. to Slash Marcellus Shale Gas Estimate 80 percent.

The Marcellus Shale assessment covered areas in Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia.

Now, one-fifth of a 410 trillion cubic feet is still a big number, but needless to say one-fifth of a big number is, when all is said and done, only one-fifth of the original number.

How many years of natural gas supply is contained in shale deposits? We can use America’s current natural gas consumption to figure this out. The U.S. currently consumes about 23 trillion cubic feet of natural gas each year. Dividing that into the EIA’s original estimate of 827 trillion cubic feet, we get about 36 years of supply from shale gas. Dividing 23 into 400 – the original Marcellus shale estimate – we get about 17.4 years of supply.

Using the revised USGS estimate, if we divide 23 into 84, we get 3.6 years of supply from the Marcellus shale. We have suddenly lost 13.8 years of natural gas supply.

The EIA will adopt the USGS estimate, so it’s official. We are left with only 22.2 years of natural gas from all shale gas sources (the Marcellus, the Fayetteville, the Haynesville, etc.).

The hype behind shale gas supply and production in the United States is troubling. While this revision applies only to  the Marcellus Shale, it must cast doubt on other shale deposit estimates.

It’s apparent that shale natural gas is not the bountiful resource is was touted as. The phrase “100 years of natural gas” certainly sounds better than 22 years of supply from shale. The number “100” has a nice ring to it. It’s a round number with a couple of zeros, and it pushes out an energy problem for many years – beyond the lifetime of nearly everyone alive today.

But when you stop to think about it, it’s really not a very big number. And now we have a number much closer to 20, which is much smaller, but perhaps more realistic.

Why Oil Prices Will Likely Stay High

After tumbling recently, crude oil prices rebounded last week. Are oil prices going to march higher again, or drop back to more “reasonable” levels? And what is reasonable to expect after crude oil’s already impressive 30 percent surge higher this year?

I believe crude oil prices are likely to stay high. They may even go higher. Here’s why and how you can profit from it.

1) Iraq Cuts Future Production Target in Half.

This spring Iraq announced that it will pump between 6.5 million and 7 million barrels per day (bpd) by 2017 – way down from its original plan of 12 million bpd.

It’s not because of low oil prices – oil prices have doubled since the 12 million bpd target was set two years ago.

Currently, Iraq produces about 2.68 million barrels a day, barely higher than under Saddam Hussein.

Iraq was one of the great hopes of those who believe we will always find more oil. Apparently, we aren’t finding it in Iraq.

2) The Saudis Failed to Cover Libya’s Shortfall.

Remember that when Libya, the world’s 17th largest oil producer, 3rd largest producer in Africa and that continent’s largest holder of crude oil reserves, fell into civil war in February. Its 1.6 million bpd production was quickly cut in half. Saudi Arabia said it would make up the difference.

Saudi Arabia DID pump more oil initially. But they have not been able to sustain the increase. Recently, Saudi oil minister Ali al-Naimi revealed that the country’s increased crude oil production has begun falling.

The Saudis blame lower demand for their “sour” (sour crude oil contains a higher percentage of sulfer and other undesirable chemicals that the preferred “sweet” ) crude. Sour crude is more difficult and costly to refine. Maybe lower demand actually accounts for the decreased production. Even so, this doesn’t do much to reassure the oil market that the Saudis can make up the difference when production of light sweet crude falls short.

Before the Libyan crisis, the Saudis claimed they could tap 4.2 million bpd of spare capacity at any time. During the Libyan crisis, the Saudis downsized their claimed spare capacity to 2.5 million to 3.5 million bpd. Some analysts believe the Saudis have only one million bpd in spare capacity. That’s not a lot of wiggle room if something else goes wrong … and something always goes wrong.

3) The Mystery in the Desert.

The Saudis are up to something. The richest oil producing nation in the world appears to be hedging their bets. Recently, Saudi Arabia announced it was going to spend $100 billion on solar, nuclear and other renewable energy sources. That is a lot of money for a country that is supposedly floating on all the oil and natural gas it should ever need.

The Saudis say they are doing this to boost the amount of spare oil they have for export. The Saudis currently consume 2.7 million bpd (27 percent of their total production) and that is expected to grow to 8 million bpd by 2025. For comparison, Americans consume 20 million bpd.

Still, if the Saudis have all that spare oil, why don’t they just sink a few more wells? Unless, maybe, they don’t really have that spare capacity.

4) The Global Economy Runs on Oil.

The International Monetary Fund (IMF) expects global economic growth for 2011 to be 4.4 percent. This will put more strain on a system that already saw global oil consumption grow by 2.6 percent in the first quarter of 2011, on top of 4.1 percent growth in the fourth quarter of 2010, according to the International Energy Agency.

5) Asia Puts the Pedal to the Medal.

While the IMF expects the world economy to grow at 4.4 percent pace, emerging market economies are growing much faster. The Asian Development Bank expects a growth in the region’s economy, of 7.8 percent and 7.7 percent for 2011 and 2012 respectively.

That’s bullish for oil prices because automobile ownership and gasoline and diesel usage is growing at a furious pace in those countries.

According to the Financial Times, while European crude oil demand has been flat, and U.S. oil demand might grow 2.9 percent, Asia, as a whole, is expected to see its oil demand rise 5.9 percent and China’s should rise 9.6 percent.

And it should keep rising. In China, a big driver of oil consumption has been growth in the domestic automobile market. Data released by the Chinese Auto Association shows sales grew more than five percent on a year-over-year basis.

I have outlined five reasons why oil prices will likely stay high. But, of course, no one can foresee the future with certainty

Could Oil Prices Go Down? Yes, but You Won’t Like Why!

The only foreseeable way that crude oil prices could fall is if we have another global recession (or depression). Such an environment would downshift those growing emerging market economies in a hurry and should send oil prices lower.

But probably not for long. Why? Because existing oil fields are depleting – the average depletion rate is just about five percent per year, according to the Association for the Study of Peak Oil. The cheap oil is being used up. As I’ve written before peak cheap oil is already upon us.

At the same time, the newer oil projects coming online require higher and higher break-even costs. Estimates of break-even costs for new oil projects range from $79 per barrel to $92 per barrel. And the heralded new sources of oil such as oil sands have significantly lower net energy returns and far higher environmental consequences than existing, conventional sources. For example, it is estimated that the Canadian Athabasca oil sands project, the largest in the world, requires the equivalent energy input of one barrel of oil to extract 1.5 barrels of oil sands crude.

A “reasonable” price for crude oil gets higher all the time.

If oil prices dipped below those higher break even prices, the new projects would shut down. Soon, we’d have less supply coming on to the market. That, in turn, would force prices higher, whether the economy was in recovery or not.

How Can You Play the Next Surge in Oil?

There are certainly many oil related individual stocks available. However, I’m a big believer in Electronic Traded Funds (ETFs). ETFs offer the diversification of a mutual fund, yet they trade like a stock – the best of both worlds.

Oil explorers and producers are leveraged to the price of oil. One of the easiest ways to play what will likely be higher prices – and big fat profit margins for oil companies – is to buy the Energy Select SPDR (XLE). And the stocks that form the backbone of the XLE should also do well on an individual basis.

Other ETFs that offer participation in higher oil (and overall energy prices) include the popular United States Oil Fund (USO), its leveraged cousin ProShares Ultra DJ_AIG Crude Oil ETF(UCO), the ProShares DB Oil Fund (DBO) and the currently out-of-favor United States Natural Gas Fund (UNG). There are many other energy related ETFs available at The EFT Stock Encyclopedia.

No one likes paying higher prices at the pump. But you can prepare for higher energy prices and potentially profit from them.