Archive for June, 2012
Inside JPMorgan’s (NYSE:JPM) Magical Fun Palace
Posted by CEO in Uncategorized on June 11, 2012
The unexpected $2 billion – or is it $5 billion? — loss incurred by JPMorgan Chase (NYSE:JPM) “whale” trader Bruno Iksil shows only too clearly the flaws in Dodd-Frank and other regulatory activity.
Big banks are still taking risks they simply don’t understand. Worse, there’s no reason to believe the regulators understand them, either.
While the banks do employ “quant” mathematicians to analyze risk, the problem is the quants are also paid to help maximize the profits from the banks’ trading desks.
Not only is this a bit of a conflict, but they are working off a market model that has failed repeatedly in the past.
It’s a dangerous mix for investors and taxpayers alike.
The Failed Trade at JPMorgan (NYSE:JPM)
In a sensible financial system JPM would do this simply by going out and lending lots of money to corporations, or by buying their bonds.
However, according to The Wall Street Journal, in the magical fun palace of today’s trading room, JPM achieved this instead by buying an obscure credit derivatives index known as CDX.NA.IG.9.
The key is that this is a “mature” index. Conceived of 10 years ago, the index JPM bought only had 5 years of life remaining.
In other words, not only did JPM use this foolish roundabout as a way to take a position on credit, but it did so through an old index, which could be expected to be less liquid than a newer index that attracted the most trading volume.
Then sharks began to circle.
That’s one of the problems with trading that is distinct from a long-term investment; eventually you have to unwind the position.
Whereas you can hold a bond to maturity and a stock forever, collecting dividends, instruments such as credit default swaps, let alone indexes on credit default swaps, have to be sold as well as bought.
JPM’s loss on this position was originally estimated at $2 billion, but is now admitted to have the potential to rise to $5 billion or more.
You can expect all of the hedge funds that bought contrary positions will extract their “pound of flesh” in the unwinding process.
Perhaps the most disquieting aspect of this fiasco is that no laws appear to have been broken.
It was not a case of a “rogue trader” hiding his positions from the risk management system. The risk management system simply failed altogether.
Risk Management?…Not Hardly
First, it assumed that two quite different instruments “hedged” each other, so that large balancing positions could be taken out on both without great risk.
Second, it relied on the obsolete and theoretically unsound “Value at Risk” (VaR) metric to measure its overall exposure.
VaR was already discredited by its complete failure to control risk in the 2008 collapse, when securitized mortgage debts behaved completely differently from what the model predicted.
As early as August 2007, Goldman Sachs CFO David Viniar said the market was experiencing “25-standard-deviation days” one after another.
That statement in itself should have been sufficient to discredit the VaR system. Under its assumptions, such days should have a near-zero probability of occurring in the entire history of the universe.
But the reality is that financial markets are not “Gaussian” in the technical term, or even close.
Extreme outcomes are much more likely than predicted by Gaussian models like VaR, and highly leveraged positions can lose much more money than predicted by a VaR system.
As I set out in my book “Alchemists of Loss,” co-authored with Professor Kevin Dowd, VaR and similar systems should be scrapped forthwith.
But you don’t need to have read “Alchemists” to have understood this. Others have said it, although I like to think not as well!
The fact that JPM was still using the discredited VaR indicates that its top management did not understand how to manage risk, or indeed what the risks in exotic derivative products were.
Maybe the bank’s quants understood the risks that were being run. But if so, they didn’t speak out, since they wanted to keep their jobs and not offend the politically powerful top traders like “the Whale.”
As citizens and taxpayers, there is one conclusion to be drawn from this.
Since the big banks don’t understand what risks they are running, and it’s quite clear that regulators don’t understand them either, the only solution for institutions “too big to fail” is to restrict what they can do.
Bonds, stocks, forward foreign exchange and maybe simple interest rate swaps traded on an exchange should be the limit of what these institutions are allowed to do.
Anything more exotic should be left to the hedge funds, which should be allowed to go bust without any disgraceful bailouts like that of Long-Term Capital Management in 1998- -which was in retrospect a major cause of the 2008 debacle.
As investors, the message is also clear: we should avoid the financial sector, at least the “too big to fail” banks and big insurance companies.
Investing in them would be like investing in General Motors (NYSE:GM) if all its cars kept exploding instead of just a few.
Truly, the global financial system is Unsafe at Any Speed!
- Money Morning:
The JPMorgan (NYSE: JPM) Losses: Here’s What Happened - Money Morning:
JPMorgan’s (NYSE: JPM) Busted Bet Was No Chance Encounter - Money Morning:
The Secret System that Blew Another Hole in the Euro - Money Morning:
Higher Bank Dividends Would Relieve Shareholder Stress
Amazing What a Few Thousand Bucks Can Buy You in Washington
Posted by CEO in Uncategorized on June 11, 2012
Let’s talk today about the cheap cost of buying favorable legislation in the House, and about how bills are titled to deceive us, even when there’s no good reason to lie to our faces.
But first, I have to give a giant shout-out to Kevin Wack, the Capitol Hill reporter for theAmerican Banker, which I read every day, and you should, too.
Kevin just made front and center something that I hadn’t seen nor heard about and can’t find anywhere else in print. But, it’s right up our alley here. So, give Kevin all the credit for this little tale.
Once upon a time, in a Congress full of proud and proper, true, honest, and transparent representatives of the American people, something resembling gangrene found its way into the illustrious body and backbone of some (probably all) of that elite club’s members.
The infection, green like the color of money, was most recently seen oozing out of a few House members’ back pockets.
Thankfully, the amount of green was small enough such that the civic-minded donor of the little largess wasn’t set back much for his patriotism.
Kevin, acting like the brilliant pathologist that he sometimes plays, informs us that the donor was Howard Milstein (along with his wife and some family members), the CEO of Emigrant Bank in New York. And the “largessees” were Republican Rep. Michael Grimm of Staten Island ($2,500), Democratic Rep. Carolyn McCarthy of Long Island ($4,000), Dem. Rep. Gregory Meeks of Queens ($3,000), and Dem. Rep. Carolyn Maloney of Manhattan ($2,000).
What’s newsworthy here is not that the gangrene caused the introduction of a bill titled, “A bill to amend the Dodd-Frank Wall Street Reform and Consumer Protection Act to adjust the date on which consolidated assets are determined for purposes of exempting certain instruments of smaller institutions from capital deductions.”
It’s that today it costs so little to get your own legislation written in Congress.
A few thousand bucks.
As an aside, I think that’s a harbinger of how bad things really are in the economy. What we would expect to have been an inflationary spiral appears to be suffering from some terribly deflationary effects… How else would the price of honor have come down to such piddling amounts?
Anyway, Kevin’s beef is that the bill should more honestly have been titled, “A bill to prevent Emigrant Bank from losing $300 million in Tier 1 capital.”
There’s nothing really wrong with the bill. Essentially, the Collins Amendment within Dodd-Frank says that as of December 31, 2009, any bank with more than $15 billion in assets can’t count trust-preferred securities (don’t ask, they’re a type of capital) as part of their Tier 1 capital.
Emigrant Bank had more than $15 billion back then, because it prudently borrowed $2.3 billion from the New York Federal Home Loan Bank to shore up itself in the face of the financial crisis. After the crisis passed for Emigrant, it paid the money back. Today its assets are about $10.5 billion.
The bill was written to change the effective date of the Collins Amendment from December 31, 2009, to March 31, 2010 – after Emigrant paid back its loan and had less than $15 billion in assets.
It doesn’t really matter to me that, out of 7,307 banks, only Emigrant is benefited by the “Emigrant bill” and gets to count its trust preferred as Tier 1 capital. They shouldn’t be punished for being safety conscious when they had to be.
What’s problematic is that the bill was paid for, given a less-than-transparent title (really, Kevin’s right, why not call it for it really was?), and that its sponsors tried to push it through without any hearing or committee vote.
I’ll leave you to ponder what all this means.
For my part, I’m thankful to Kevin, and to Barney Frank, who forced the bill to face the true light of day and didn’t allow it to be rammed through under the radar of the press.
Thank God for a few good men still left to muckrake and call the infected animals out into the street to be identified as what they are… the living dead, or as they are less affectionately known, (some, okay, probably most, dare I say all?) Members of Congress.
Now, because I just have to, but because this space sometimes gets too long, I’m going to wait until Sunday’s WSII to tell you how messed-up the JPMorgan trade really is, how exactly it got that way, and how it shows how Wall Street really thinks and works.
And, I promise, your eyes will widen.
by
Shah Giliani
Time to Move On This One
Posted by CEO in Uncategorized on June 11, 2012
Today is the last day to review the Genesis Technology you’ve been hearing about from Michael Robinson.
You can get all the details right here before it expires… and before these plays move even more.
Michael’s first recommendation is already up 32%. And the second company you’ll hear about today is up 15% so far.
Yet these preliminary returns are nothing compared to what he’s expecting. Not when you see what these technologies can do…
Remember, opportunities like this are rare. And you have a chance to be among the fortunate few who – not long from now – will be able to say: “I’ve been in that one since the beginning.”
That’s the beauty of Michael’s research.
Just go here to watch his briefing. And again, please review it before midnight.
Mike Ward
Publisher, Money Morning
Robotics Gives the Paralyzed a Miracle
Posted by CEO in Uncategorized on June 11, 2012
A few weeks ago, the major news outlets were abuzz with details about how two patients paralyzed from the neck down used their minds to control robots.
No doubt, this is a worthy breakthrough. On the other hand…
I first wrote about a similar case back in early January, four months before The New York Times picked it up.
In a story about life-changing gains in the tech sector, I told you about the case of Matt Nagle, a Massachusetts man whose life took a turn for the worse after being paralyzed from the neck down.
To his delight, he had learned to surf the Web, send e-mails, make a robot move its hand and play video games —all with the power of his own mind.
In fact, I got so much great feedback on that and stories like it, I decided to launch the Era of Radical Change.
I mention this not to brag, but to remind you that you really will learn about key trends in cutting-edge tech long before the general public if you take the time to subscribe.
And that’s clearly true when it comes to robots.
Staying Ahead of the Curve in Robotics Stocks
Just two weeks ago I wrote to tell you how a new series of smart machines will have a profound impact on the world around us.
Here’s what I said:
“Robots of all sizes are already capable of doing some very complex tasks: They can perform surgery, hair transplants, and even climb inside the human body – through the mouth – to “eat” stomach cancers.”
You may recall that I also told you to keep an eye on Heartland Robotics, a startup based in Boston I believe is a good IPO candidate. The firm says it will produce a range of machines that will serve as “the PC” of robots.
And today, I’d like to tell you about another startup that’s pushing the boundaries of the robotics revolution.
Ekso boasts some truly great tech. Simply stated, the firm makes wearable robot suits. These are battery-powered bionic devices that strap right over the user’s clothes.
Not only that, they employ sensors and motors that allow patients to walk safely and avoid falling. Ekso says it designed the torso and leg straps to make it easy for patients to get in and out on their own.
The patient doesn’t bear the weight, however, because the device transfers its 45 pounds of load straight to the ground.
Each “Ekso” can be fitted in a few minutes for most people who weigh 220 pounds or less and who stand between 5’2″ and 6’2″.
Ekso’s name derives from the fact that many creatures — think crabs and lobsters — “wear” their skeletons on the outside.
Turning a Profit on Robotics Tech
There’s another reason why Ekso’s approach is crucial.
Recent press reports about patients moving robot arms with their thoughts left out one key detail investors should know — it will take at least several years for these products to come to market.
Not that I don’t like to see high-tech help the people who need it most. But in the long run, if firms can’t turn a profit on their products then they will have a very limited impact on the world before going bust.
So, I’m happy to report that Ekso is already gearing up for major sales. It delivered its device back in February and plans to go global soon.
Just last week, it got the green light to sell in 30 European countries. The company says it has since received an undisclosed number of overseas orders. It expects shipments to begin in a matter of weeks.
Ekso plans to focus on rehab centers. I see this as a savvy move.
These centers have the money to back the devices and the staff needed to train patients. So far, Ekso has signed 13 such outlets in the U.S. and one in Italy.
Meantime, Ekso has eight patients who use the suits and have agreed to tell their stories to the public. Their names, photos and profiles appear on the firm’s Web site under the heading “Test Pilots.”
Positioning to Go Public
From its founding in 2005, Ekso has demonstrated a focus on cash flow. Ekso began with funding from a research arm of the Pentagon, the Defense Advanced Research Projects Agency (DARPA).
Esko has also worked with UC Berkeley and struck a licensing deal with defense firm Lockheed Martin Corp. (NYSE:LMT).
And in late 2010, it brought in a heavy hitter as CEO.
He is Eythor Bender, and he has 17 years in the bionics field. More to the point, he took a company that makes artificial legs public, and before that worked at Hewlett-Packard Co. (NYSE: HPQ).
Of course, Ekso hasn’t said it intends to go public. But it’s making all the right moves to do so.
Let me close by noting that Ekso’s work defines the Era of Radical Change. We’ve never had a period with so many breakthroughs that will alter our world.
And once again, the U.S. remains the clear leader. We have so many bright minds working on tough problems that America can’t help but succeed in the long run.
Along the way, we will see people’s lives change in profound ways. Like getting paraplegics back on their feet again.
Needless to say, we’ll be watching.
To subscribe to the Era of Radical Change and receive my latest report, “The Biggest Tech Breakthrough in 50 Years,” click here.
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An Environmental Battle Mounts Over LNG Exports
Posted by CEO in Uncategorized on June 11, 2012
We’re back after three days of beautiful weather in Baltimore to celebrate Memorial Day weekend.
The mailbag received some great comments and questions last week. I felt obliged to answer one in particular – a follow-up question from a reader over the ongoing drama of natural gas exports from the United States.
Remember, if you have a question or a comment, be sure to register below and type your thoughts into the box.
Okay, question time.
Q: Since Cove Point was a working LNG import terminal in the past, can you please tell us why it is not acceptable now for it to be retrofitted as an export terminal? ~ Linda
A: Let me first put Linda’s question into context. Last week, I answered a question from Jim O. regarding the other companies – other than Cheniere Energy Inc.(AMEX: LNG) – that have filed for applications to export liquefied natural gas (LNG) from facilities around the country.
One of these facilities is Dominion’s (NYSE: D) Cove Point facility.
Constructed and certified in 1972, the terminal had been used to import natural gas from around the globe. Around the time of its construction, the Sierra Club, one of the most influential environmental non-profits in the United States, had sued to block construction of the facility.
The case was ultimately settled, but concessions were made to appease the plaintiff. One is that the Sierra Club has the right to approve or disapprove any plans to expand the existing facility, and expected that the terminal in Lusby, Maryland would remain a relatively minor import facility.
The key word here is import, because the facility was originally importing LNG from Algeria after certification in 1978. After various starts and stops over two decades, Dominion purchased the facility in 2002 with the goal of importing and storing natural gas on behalf of a number of global operators.
But then, a funny thing happened.
In the past few years, a swath of energy has been unlocked in the United States thanks to technological innovation in hydraulic fracking and horizontal drilling. In fact, so much natural gas has been unlocked, that the United States now has the capacity to begin exporting natural gas to energy-starved nations around the world, where prices are six or seven times higher than they are here.
This is one profitable venture.
No wonder companies are so eager to retrofit and expand existing import facilities to ship LNG instead. And Cove Point is an ideal location, given its access to the Chesapeake Bay and direct line across the Atlantic Ocean.
There’s just one problem: The Sierra Club says that it won’t approve any expansion to the lands.
As a result, Dominion has sued the Sierra Club. The company has gone on the attack, stating that the facility will generate and support nearly 15,000 jobs, generate $1 billion in federal, state, and local taxes, and lower the U.S. trade deficit by several billion dollars a year.
These are pretty compelling arguments, but the Sierra Club might have the upper hand right now. Predictably, the Club has stated that exporting natural gas will encourage fracking and drilling, which could have significant impacts on the environment, increase the cost of domestic natural gas, and has highlighted its own power in the original agreement.
In some ways, the Sierra Club is the landlord even without holding any ownership over the property.
The Strongest Lobby in Washington
I know this is a strong point of debate, but during my time in Washington, I cultivated a strong opinion.
It is my personal opinion that there is no stronger lobby in Washington than the environmental lobby. Here’s why.
In order to construct an export facility or retrofit an existing one, a company must jump through a number of regulatory hoops. They must get acceptance from the Department of Energy, the Environmental Protection Agency, the Federal Energy Regulatory Commission, Congress through acts of law, and a number of other administrative agencies.
Meanwhile, the environmental lobby is pushing big bucks to influence all of these regulators on what should and should not be allowed in energy production. They use a strong social and ecological message to supersede economic ones.
Even after all of those “permission slips” have been signed, even when the first construction worker is inches from dropping that first shovel into the ground, environmental groups can swoop in at the last minute, using the legal system and the courts to their advantage. Lawsuits can act as a strong deterrent here against companies and regulatory agencies. And any law suit against any company, in the end, is also a lawsuit against their shareholders.
Yet there’s no doubt that LNG exporting is going to be big business, one with strong profits for companies and investors alike.
That’s another reason why Cheniere, which has already cleared all the regulatory and legal loopholes and is ready to break ground, is still the best option in this space for now.
Still, there are external factors that underlying figures simply can’t provide. Dominion remains a strong company, one with attractive numbers to back it up. It has received authorization from the Department of Energy to export LNG, and tests are being done to determine if the company can retrofit the facility without expanding on the existing land.
Still, we’ll have to continue to watch this legal situation closely and dissect the original agreement before thinking about pushing off into the Chesapeake.
A Small Company…For Now.
Posted by CEO in Uncategorized on June 11, 2012
Few stocks turn every $1 invested into more than $100 – not in a short amount of time, anyway. But the very next company to do it could be the one you heard about Friday.
Here are the details, in case you missed it.
Remember, opportunities like this don’t come around often. It’s been years since the last one.
Yet the returns – they can come very quickly… especially in this case. Once you see what this company’s doing, you’ll immediately understand why.
As I mentioned last week, you have until Thursday to access this briefing.
Mike Ward
Publisher, Money Morning
Investing in Japan: Is There Light at the End of the Tunnel?
Posted by CEO in Uncategorized on June 11, 2012
With an aging population and far too much government debt, the conventional wisdom is that Japan will never again see the vigorous economic growth it once enjoyed.
The earthquake and tsunami of March 2011 only reinforced this view. However, that tragic episode did have another side.
It showed the resilience and discipline of Japanese society.
There was almost no looting, for example — and recent economic data suggest that the Japanese economy is not as dead as it seemed.
First quarter Japanese gross domestic product (GDP) came in at an annual growth rate of 4.1% –far higher than the United States, Canada, Australia, or anywhere in the Eurozone.
Given that Japan has been in perpetual near-recession for 21 years, with no surges of productivity like the U.S. enjoyed in the late 1990s, it’s really not a bad performance.
You can also see Japan’s true strength from its exchange rate, which is currently 79 yen to the dollar, up from around 120 five years ago. That makes visiting Tokyo very expensive.
However, it’s also sign of a highly competitive economy.
Investing in Japan: What You Need to Know
Before 1995, I lived in another economy that was similar. Britain ran deficits much like the U.S. does.
So believe me when I tell you, deficits are not exactly a sign of superior economic health.
Even so, the Japanese stock market is still trading at less than a third of its 1990 peak.
However, that’s no longer something to sneer at since the S&P 500 is also trading well below its 2000 peak.
The reality is that speculative bubbles such as that in Japanese stocks and real estate in the 1980s and U.S. stocks in the 1990s and housing in the 2000s are enormously damaging. The after-effects can last for years, or even decades.
These quasi-politicians at central banks should not be allowed to play games with the money supply. Rather, they ought to adopt an automatic system such as a gold standard.
Of course, it’s all very well quoting the superior returns over the long term from equity investments. But the truth is, we have finite lifespans.
An investment in the U.S that loses money for 12 years and counting — or 22 years and counting in Japan — is not very attractive as a means of saving for retirement (unless you’re 25).
Nevertheless, while the tunnel may be a long one, it is not an infinite one. Today in Japan there are signs we may be emerging from the other end.
Robust growth is the means by which both Japan and eventually the U.S. will emerge, which will reduce the excessive debt levels in the system and allow equity and other asset values to start increasing again.
Naturally, the politicians have to stop running huge deficits in order for this to happen, but in Japan this may finally be happening, with the government proposing to double the consumption tax to 10% in two stages by 2015.
Two Ways to Invest in Japan
The SPDR Russell/Nomura Japan smaller companies ETF (NYSE: JSC), for example, has now been running since 2006 and has an expense ratio of a modest 0.56%. It looks to be an excellent way to tap into Japanese small company growth.
Alternatively, you should consider investing in the Japanese financial sector, which has major growth opportunities in Asia and has avoided many of the problems of the 2008 meltdown.
In this area the best-capitalized company is Orix Corporation (NYSE: IX).
Orix, originally a leasing specialist, has expanded into most sectors of commercial and investment banking, with an emphasis on investment rather than trading. It has capital of around 15% of assets — nearly double the capitalization ratio of most banks, in Japan or elsewhere.
What’s more, Orix is trading on a P/E ratio of around 10 and at 53% of book value. For Japanese-minded investors it’s also a bargain.
After a long downturn, Japan is poised to rebound. The conventional wisdom, as is often the case, is wrong.
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The Glory of Their Deeds
Posted by CEO in Uncategorized on June 11, 2012
Chester Nimitz and William “Bull” Halsey are more familiar names, but the truth is neither one of them was as highly decorated as Eugene B. Fluckey.
Before Japan surrendered, “Lucky Fluckey”, as he was known, received numerous medals including four Navy Crosses, the Distinguished Service Medal, the Legion of Merit, and the highest decoration of them all, the Medal of Honor.
As the commander of the U.S.S. Barb, Fluckey and his crew sank 29 vessels,including an aircraft carrier, while surviving an estimated 400 shells, bombs, and depth charges fired by the enemy.
Always innovative, he even conceived of a method for firing rockets from a submarine – and was the first to do so in anger off the coast of Japan in 1945.
His crew led the only invasion of the Japanese mainland, as eight of his saboteurs blew up a 16-car train under the cover of darkness.
But through it all, not one member of Fluckey’s crew ever received a Purple Heart.
As retired Capt. Max Duncan, a torpedo officer on the Barb, recalled, “He gave you a job, expected you to do it, and didn’t micromanage.”
Loved by his crew, Fluckey kept a secret stash of beer aboard the Barb, serving up cold ones every time an enemy ship went to the bottom.
“The beer didn’t last too long,” Captain Duncan remembered, “because we sank too many ships.”
Sadly, like so many others of The Greatest Generation, time eventually caught up with Admiral Fluckey. He passed away in 2007 at the age of 93.
But before he passed, he left us with a few thoughts. Speaking before a new group of submariners, the Admiral said:
“Serve your country well. Put more into life than you expect to get out of it. Drive yourself and lead others. Make others feel good about themselves, they will outperform your expectations, and you will never lack for friends. On U.S.S Barb, our philosophy was, ‘We don’t have problems – just solutions.”
Of course, Fluckey really was one of the lucky ones. He survived while so many others honored this Memorial Day made the ultimate sacrifice.
So as you ice down some cold beers of your own this weekend, remember the fate of the boys of Pointe du Hoc, the Ia Drang Valley, and so many other countless battlefields the world over.
To the living and the dead, we all owe a debt that can never be repaid. Without them, the world would be a much darker place – that much I’m sure of.
From our entire staff, have a great Memorial Day!
by
Steve Christ, Managing Editor
Money Morning
There’s only one thing we know for certain when it comes to making money!
Posted by CEO in Uncategorized on June 11, 2012
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What This Global “Texas Standoff” Means for Oil Price
Posted by CEO in Uncategorized on June 11, 2012
It’s Iran again.
Actually, it has never stopped being about Iran, ever since the West passed heavy sanctions and the European Union decided to end all Iranian crude oil imports beginning July 1.
I know I keep going back to this issue, but it’s for one very simple reason.
The rising tension between Tehran, on the one hand, and Washington and Brussels, on the other, is still the single most serious geopolitical element impacting the global oil market today.
And now the matter is finally reaching a head.
This afternoon I’ll be on Fox Business to talk with journalist Ashley Webster about the Iranian crisis. (If you want to tune in, “hit time,” as they call it, is set for 2:20 p.m. Eastern.)
But I thought I would fill you in beforehand.
So here’s the gist of what I will be telling Fox this afternoon.
Even After Two Days of Meetings
Two days of meetings have just concluded in Baghdad, between Iran and the six major powers (the five permanent members of the UN Security Council, plus Germany). There was some spin applied in the rhetoric before and after the meetings, but the conclusion is strikingly clear.
Absolutely nothing was accomplished.
The next set of talks is scheduled to take place in Moscow on June 18 and 19, but time is running out.
Iran is now looking at losing one-quarter of its monthly oil exports, with no alternative markets for that oil in sight. That’s right – the Chinese have decided against becoming the “importer of last resort” for Iran. And their primary shipping insurers have knuckled under before the sanctions and are no longer covering Iranian crude consignments.
The sanctions have also made it difficult – on purpose – for Tehran to access international banking networks to exchange currency from the sales it does make. That means it costs Iran more to use indirect, and often shadowy, ways of moving money, squeezing even further the profits from sales.
Rather important for a nation whose national budget is dependent upon oil sales for 90% of its revenue…
Yet as we approach July 1, the imminent problems are not all on Iran’s side.
The EU is Going to Feel the Effects, Too
Eleven EU countries import oil from Iran each month.
For most of them, the transition to other suppliers is a possibility to make up the difference – especially imports from Libya, where oil has come back on line quicker than anticipated.
However, for the three European countries most affected, the situation is quite different. Unfortunately, these three nations are also the three southern-tier EU members (at least for the moment) with the most acute financial problems.
Greece has been importing at least 30% of its oil from Iran monthly; Spain 14%, and Italy 13%.
Saudi Arabia has agreed to make up the volume difference, but only through the first delivery cycle, and without guaranteeing any pricing floor. The EU still has not worked out how it will compensate for deliveries past that, should the embargo last for any length of time.
So what’s going to happen?
Iran believes Europe will have to blink first in this ongoing game of diplomatic “chicken.” So Tehran has a single objective in these talks: play for time.
And, oh yes, stronger sanctions are working their ways through the halls of the U.S. Congress, assuring that the situation for a recalcitrant Iran will only become worse.
Meanwhile, the effect on global oil prices will only become more acute as the embargo kicks in.
Oil may be trading at around $91 per barrel (WTI) right now.
But that’s temporary.
The only reason we have not seen this rise in prices taking shape earlier is because of the current European sideshows following the French and Greek elections. The Continental angst has created ripples of demand concerns on both sides of the Atlantic, promoting a short-term (and emotionally-led) retreat in oil prices.
The pricing reversal in the other direction will follow in lock-step with the collapse in the talks between Iran and the global powers.
Already, my Moscow oil contacts are concluding that nothing of consequence will take place there next month, either. Actually, some think the embargo may even help increase Russian imports to Europe.
Brussels, however, certainly does not want to become more dependent upon Russian oil, since it is already dealing with the problem of being overly reliant on Russian natural gas.
So, what is the likelihood that those talks will collapse? If I were handicapping that eventuality, I would currently put that collapse as a 90% probability. Why? Because both sides have put down demands that the other cannot meet.
During the initial April meeting in Istanbul, the Iranian delegation required that the West suspend their sanctions before Tehran would discuss its nuclear program. While the Vienna-based International Atomic Energy Agency (IAEA) is holding out some hope for a renewed round of inspections, we have been down that road many times before. It is a non-starter. The West will not agree to freeze the sanctions first.
For their part, the U.S. and the EU have laid down three non-negotiable requirements before they will annul the embargo and the sanctions. These require that Iran:
- end all purification of uranium (both to the 20% and 3% levels);
- move all uranium currently purified out of the country; and
- open up the super-secret and heavily fortified underground installation at Fordo near the sacred city of Qom to full international access.
Iran will never agree to the last two; probably not to the first one either.
Absent the rise of another Neville Chamberlain and another Munich-like appeasement, we have a Texas standoff here.
And that assures increasing tensions, rising volatility in prices and a very interesting summer in the oil markets.
by DR. KENT MOORS | published MAY 25TH, 2012
P.S. If you still haven’t seen this, I just raised my target price for oil – significantly.Here are my new projections.
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