Continued Signs of Weakness

It was a bad week for equity investors, with all three indexes posting sizable losses, though US Treasury debt saw a pop on signs that the economy continues to weaken. The S&P 500 gave up 3.1 percent in this short trading week, with the Nasdaq Composite sliding 4.7 percent and the Dow Jones Industrial Average giving up 2.8 percent. Crude oil also gave up about 8 percent for the week.

The jobs report dominated the news today with revelations that the labor market shed 84,000 jobs in August, putting the unemployment rate at a five-year high of 6.1 percent. June and July’s number was also revised sharply higher, with additional data showing that 60,000 jobs were lost in July and June’s total loss moved up to 100,000 from the previously reported 51,000 in each month.

There are some analysts harboring suspicions that the unemployment rate may be artificially inflated by the federal governments program to extend benefits, which may be encouraging some people to list themselves as job seekers who may otherwise have dropped out of the workforce. Unfortunately, no firm data has been released enumerating workers drawing the extended benefits, so there’s no way of knowing the full effect of the program on unemployment rates.

Stocks fell in the wake of the news with Treasury prices moving higher as investors began betting that interest rates will remain on hold, if not fall, in coming months.

The data in the jobs report was particularly unwelcome given the greater than expected jobless claims number, with initial claims jumping to 444,000 and continuing claims rising to 3.435 million. Claims from the previous week were also revised upward to 429,000 and 3.43 million, respectively.

Unfortunately, initial and continuing claims will probably worsen in coming weeks as there are four named storms swirling for the first time in a decade. And although the damage from Gustav wasn’t a severe as many had expected, tropical storms Hanna and Josephine as well as category four Hurricane Ike are bearing down on the US, with Hanna expected to make landfall on the Southeast coast on Saturday. Those storms, if they indeed make landfall, will almost certainly disrupt business and throw at least some workers off the job while factories and workplaces are repaired.

Construction spending fell 0.6 percent in July, as both residential and commercial building dropped off. June’s number was revised upward, however, from a decline of 0.4 percent to a gain of 0.3 percent. That doesn’t bode well for construction firms, though that may be largely priced in as most have announced they continue to expect poor results through the end of the year.

Mortgage applications posted marked gains last week, up 7.5 percent as refinancing activity spiked 35.2 percent. The average rate for a 30-year fixed rate mortgage fell to 6.39 percent from 6.44 percent, 15-year fixed-rates increased to 5.96 percent from 5.94 percent and one-year adjustable-rate mortgages (ARM) declined to 7.11 percent from 7.15 percent.

Foreclosures continued to accelerate in the second quarter, hitting the fastest pace in almost three decades as new foreclosures increased to 1.19 percent, breaking 1 percent for the first time since tracking began. The total inventory of homes in foreclosure hit 2.75 percent and loans with one or more payments overdue rose to a seasonally adjusted 6.41 percent of all mortgages.

The real estate markets continue to weigh on economic growth and, combined with the slow job market, will probably help ensure there are no Federal Reserve rate increases any time soon. But the falling prices and foreclosure sales may be helping the housing market find a bottom, with the delta on foreclosures and delinquency slowing and sales of previously owned homes rising.

Despite the ISM Manufacturing Index dipping into contraction territory again, falling from 50 in July to 49.9 in August, factory orders climbed a greater-than-expected 1.3 percent in July, and June’s number was revised sharply higher to 2.1 percent from 1.7 percent. Nondefense capital goods orders, a barometer of business spending, increased 2.5 percent. Transportation-related orders also helped fuel the performance, rising 3.2 percent after declining 1.8 percent, with nonmilitary aircraft and parts orders surging 28.1 percent.

---

Our readers are seeing profits close to 400% in 2008 from investing in products the Pentagon and the nation cannot survive without. 

If you invest in these resources, then you’re almost guaranteed to make profits.

Go here and see exactly what resources the Pentagon have to have today and every day.

---

Despite major headwinds facing US-based airlines, many foreign airlines are upgrading their fleets. That’s largely the driving force behind the threatened machinists strike at Boeing, as the company has an almost eight-year backlog of orders, primarily from foreign airlines, to fill. The unionized machinists are expected to walk off the job tomorrow barring any last minute deals, which isn’t likely.

Same store sales were tepid in August, though discounters such as Wal-Mart and BJ’s Wholesale Club fared well as even more affluent consumers have began adjusting their shopping habits in response to higher prices. Sales were up a weak 1.7 percent, contributing to a less-than-lucrative back-to-school season as shoppers cut budgets and focused on the necessities.

Finally, there was some good news on inflation, though there’s also bad news for workers. The Labor Dept released data this week showing that nonfarm productivity rose 4.3 percent in the second quarter, while labor costs fell 0.5 percent. Combined with falling payroll numbers, that means fewer workers producing more goods, reducing the risk of a wage spiral, which would further fuel inflation. On the other hand, the lower wages means less buying power, which isn’t good for the consumer. So although it’s a bit of a double-edged sword, it does make the Fed’s decision-making process a bit easier.

Natural gas has long been known as the widow-maker given its extreme volatility, but it’s a vitally important resource for the US. In the latest issue of The Energy Letter, Elliott Gue looks at the North American liquefied natural gas market.

Just three years ago, the main topic of conversation for the North American natural gas markets was liquefied natural gas (LNG).

For those unfamiliar with LNG, it’s nothing more than super-cooled natural gas. When gas is cooled to around minus 260 degrees Fahrenheit (minus 162 degrees Celsius), it condenses into a liquid.

Better still, as gas cools, it takes up less space; LNG takes up roughly one-six-hundred-and-tenth the volume of gas in its natural gaseous state. To put that into context, a beach ball-sized volume of gas shrinks to the size of a standard ping pong ball when it’s converted to LNG.

The benefit of this is transport. Traditionally, the vast majority of natural gas has been transported in its normal gaseous state by pipeline. So most natural gas consumed in the US was either produced domestically or imported by pipeline from neighboring Canada.

By extension, gas reserves located far from existing pipeline infrastructure had little or no value. Although oil from such fields can be loaded onto tankers and shipped anywhere in the world, gas was considered stranded. Stranded natural gas was routinely burned (flared) or re-injected into the ground as a form of permanent storage.

LNG frees gas from the pipeline grid. If you’re able to turn natural gas into a liquid, it can be loaded onto tankers just like crude oil and transported anywhere in the world. Gas reserves once considered stranded and useless can be exploited using LNG technologies.

The conventional wisdom just three years ago was that with Canadian gas exports to the US likely to fall and domestic production at best stagnant, the US would need to source more LNG from further afield; LNG from Russia, the Middle East, Australia and Africa would fill the gap.

Back to the US

But what a difference three years can make. This year, US natural gas production is projected to rise at the fastest pace since the 1950s--an astounding 4.4 billion cubic feet (bcf) per day for 2008 alone. This is no one-off fluke. Although production in Canada and Russia actually shrank in 2007, US production rose 2.2 bcf per day. A similar 2.2-bcf-per-day jump in production is projected for 2009 and, quite possibly, for 2010.

The US is already the world’s second largest producer of natural gas with 2007 production of 52.8 bcf per day compared to Russia’s 58.8. Both nations were well ahead of No. 3 producer Canada, which had just 17.8 bcf per day in output. But here’s what’s even more astounding: With projected production of 61.8 bcf per day in 2009, it’s quite possible the US will be the world’s largest gas producer depending on how quickly Russia can ramp up supplies.

---

No matter which candidate gets into the White House, post-election changes to the tax law could wipe out companies' profits and with it, most investors' portfolios.

MLPs avoid taxation, which will shield them from the new tax laws. I’ve selected a special handful that’ll protect your portfolio while giving you returns as high as 43% in a year.

Go here to get my free report and see why MLPs pay much higher dividends –– like 21.1% a year for the past 5 years.

---

During second quarter earnings season this year, I still heard significant talk of LNG. But the perspective is totally different. There’s very real talk of North America becoming an exporter of LNG rather than a big importer.

Chesapeake Energy is one of the largest natural gas exploration and production (E&P) firms in the US. Chesapeake’s CEO, Aubrey McClendon is also one of the most astute players in the US natural gas market; we can’t afford to take anything he says lightly. Check out this quote from Mr. McClendon during the company’s second quarter call:

…We will look at Investing in LNG export facilities, and we are studying that right now. We’ve got to figure out a way to get some linkage to the world market, and we are dedicated to trying to find a way to achieve that linkage…I can’t talk too much about it, other than to tell you that we read the papers and see that gas around the world goes for twice what it goes for here [in the US]. And so, my view is that we make a great widget here, and that widget is valued at X here and 2X around the world. So I am trying to figure out a way to get it on a boat, and get it to some overseas markets as well…. 

Source: Chesapeake Energy Corporation Q2 2008 Earnings Conference Call, Aug. 1, 2008

The US has built several LNG import terminals over the past few years in anticipation of a surge in demand for imports. But with overseas gas prices close to twice what they are in the US, what we really need is an LNG export terminal. This way we could transport cheap US gas to foreign markets where demand is sky-high.

This isn’t the first time this idea has seen the light of day, and I suspect you’ll hear more about it in coming quarters.

Another topic that received considerable attention during this quarter’s earnings season: compressed natural gas (CNG). CNG is a form of natural gas that can be loaded onto vehicles such as buses, taxis and passenger cars. Currently only about 1.5 percent of US natural gas consumption goes to the transportation industry; diesel and gasoline derived from crude oil still rule US highways.

But CNG has several advantages over crude-derived fuels. First, it’s far more environmentally friendly, producing little or no particulate emissions and a fraction of the sulphur dioxide, nitrous oxide and carbon dioxide. Secondly, it’s far cheaper than crude oil: At $115 per barrel, crude costs about $19 per million British thermal units (MMBtu) compared to less than $9 for natural gas today. And finally, growing US natural gas production means that CNG could cut oil import dependence, at least to some extent.

Admittedly, this is an idea in its early stages, and there are significant infrastructure and practical hurdles. Nonetheless, billionaire T. Boone Pickens spent $60 million on a national television campaign promoting this idea, and he’s pitched his plan to both Presidential candidates.

In my opinion, expanding the use of natural gas as a transportation fuel is a good deal more practical and feasible than promoting solar power and other forms of renewable energy as a short-term solution to meeting US electricity demand.

For the complete article, go to http://www.kciinvesting.com/articles/9340/1/Gushing-Over-Gas/Page1.html.

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat if the federal government.

Join Neil George, Roger Conrad and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011364 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.