It is no secret that at Treece Investment Advisory we are very bullish for the U.S. economy and equities, more than we have been in the last decade. Although signs of economic growth may not be noticeable just yet, they are all there. Residential real estate is beginning to sell and home builders are looking for new projects, corporations are beginning to hire, energy costs are beginning to creep back down, and so on. It is our belief that two key factors are going to drive the U.S. economy going forward.

First of all, businesses are looking for some certainty regarding Washington’s policies and how it will impact their respective industries. Second, once the U.S. taps in to the oil and natural gas finds in the Dakotas, Midwest and New York, the economy will take off. Cheap energy means that factories can operate at a lower cost, which will in turn lower the cost of goods to consumers, who will have more money for discretionary spending as their gas/electricity bills will drop along with prices at the pump. The increased demand for these goods will surely result in new job creation to meet consumer demand. History has seen this unfold before, during the early 1980s. Once energy was actively sought after domestically prices were nearly cut in half and U.S. gross domestic product grew at nearly 10 percent year over year.

Once the economy hits this phase of substantial growth, inflation may be the truck that few investors see coming. Remember that since the credit crisis in 2008 the U.S. has had two rounds of quantitative easing. Between the bank bailouts and QE2, several large lending institutions have cash and cash equivalents on hand that they have been hesitant to loan out. Due to a relatively low demand for loans from businesses and increased lending restrictions following the passing of Dodd-Frank, banks have been more than content to park their money at the Federal Reserve and take home a 1 percent to 3 percent return with no risk. However, when rates begin to rise and lending to the Fed is no longer profitable, banks will begin to offer attractive loans to businesses and retail customers, and that is when inflation will rear its ugly head.

We have said before that in order to have inflation there must be two factors present; volume and velocity of money. The volume is most certainly there following QE2, but the velocity is not. Velocity has actually been on the decline since 2008, which explains why all of this newly printed currency has not found its way into the economy just yet. The price increases that we have seen in consumer goods, energy and agricultural products have been due to a high demand with a lower level of supply, not due to inflation.

Once this money makes it through the economy, it would not surprise us to see high single digit inflation for a period of time. The economy can handle this influx of cash, as long as growth exceeds inflation. Many investors hear inflation and think of it as a bad thing. We actually need money supply to grow at roughly the same rate as the economy expands. Without this positive correlation, we will either have too much money in the system which will raise the cost of goods, or we will not have enough money in the system and prices will be forced to drop substantially in order for consumers to be able to afford them. That sounds great from a consumer standpoint, but when manufacturers produce goods for more than they are able to sell them for, layoffs are sure to follow and the economy would likely retract.

There are places to be invested during inflationary times and places to avoid. Historically commodities, which include gold, silver, copper, oil, natural gas, real estate, agricultural products and so on, hold their value very well during these times. If inflation outpaces economic growth, dollar-denominated assets would not be solid as the value of the dollar would likely slide. We will continue to watch both inflation and GDP and look for the sector that we feel will be most profitable, but even with inflation lingering, do not rule out U.S. equities just yet.

Ben Treece is a 2009 graduate from the University of Miami (Fla.) with a bachelor of business administration degree in international finance and marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and a stockbroker licensed with FINRA, working for Treece Financial Services Corp. The above information is the express opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Tags: Ben Treece, government policy, inflation, natural gas, oil, Quantitative easing

This entry was posted on Sunday, June 10th, 2012 at 12:00 pm and is filed under Toledo Business Link, Treece Blog.
You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.

Several times during the past couple of weeks I have heard pundits, politicians and various journalists explain that the reason gasoline prices are so high is because of greedy speculators. Bill O’Reilly has ranted about the speculators in oil several times lately and feels that it is his moral duty to look out for the “folks” and personally do what it takes to get the price of gasoline down to what he thinks is a reasonable level.

Let’s first define what a speculator is. A person who speculates on the price of oil will purchase oil now for a future delivery or promise to deliver oil in the future. In both cases the speculator has no intention of taking delivery of the oil or of delivering it in the future. He is hoping to go to the opposite side of the contract before the delivery date comes around.

The thought process is that the price of oil will move in the direction most favorable to the speculator before the end of the contract. So if I decide to purchase oil now for future delivery, I think that the price will go up in the future and I lock in my price now. If the price does increase before the delivery date I can unwind the contract and make a profit. If, however, the price goes down in the future then I lose money on the contract.

If I promise to deliver oil in the future at today’s price then I am hoping that the price of oil will go down before I have to deliver it and I can fulfill the contract at a cheaper price than I sold it for. If it does, then I make money. If the price of oil goes up in the future, I lose money.

In all of these circumstances there is always another person on the opposite side of the contract who believes he is right and I am wrong. Meaning that for every evil speculator betting the price of oil is going to go up, there is another evil speculator betting in the opposite direction.

It always has to be a zero sum game.

The other type of speculators are called hedgers. These are people who have the commodity in their possession, will have it soon or who will need the commodity in the future and want to lock in a price today. For example, an airline company may need to purchase a million gallons of jet fuel for their flights next month. Thinking that the price of jet fuel is going to go up, and not knowing how much, they speculate or “hedge” their purchase today and gain a predictable price for next month.

If the price of jet fuel goes up they make money by the fact that they locked in at a lower price. If the price of jet fuel goes down they can purchase at the higher price, roll the contract forward for a price or back out of the contract altogether.

Farmers work the same way. They will speculate on the price of their crops that will be harvested in the fall and lock in a price in the spring. They essentially sell their crop before they harvest and know what their profit is going to be.

Most major industries that use commodities in their business speculate on both sides of the transaction to make prices and profits more predictable.

Without the speculators that are not manufacturers or farmers, there would be very little liquidity to all of the contracts that are bought and sold. Eliminating this process will dry up the liquidity and send the commodities markets overseas where they are appreciated.

As one of those speculators and hedgers, I take umbrage that I am evil and greedy. I want to make money for my clients by taking advantage of the tools and techniques available in the marketplace. By the way, they also pay taxes on the gains in all of these transactions.

Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard every day at 4:06 p.m. on “After the Bell with Brian Wilson and the Afternoon Drive” and every Wednesday and Thursday at 6 p.m. throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at garyrathbun@privatewealthconsultants.com.

Tags: A View from the Gulch, Gary Rathbun, gasoline costs, oil, speculators

This entry was posted on Friday, March 2nd, 2012 at 4:59 pm and is filed under A View from the Gulch, Toledo Business Link.
You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.

I received an email from a reader following my article “The True Economic Numbers Don’t Lie” last week in which the respondent asked my thoughts on the energy policy we currently have in the U.S. Many readers enjoyed Dock David’s article “Lighting the Fuse,” which appeared in the Toledo Free Press last week, but for those who missed it, Dock commented on ways to jump start business, while citing current energy policies as being a detriment to the U.S. domestic economy. This is a belief that we hold across our firm and one that I thought needed a little more in-depth analysis this week.

For anyone who tracks the oil and commodities markets it should not be any shock that we have seen a spike in prices at the pump in the last week. After all, a few weeks back Saudi Prince Alwaleed bin Talal al Saud told CNBC that Saudi Arabia would not allow oil to go over $100 per barrel. It seems that no matter what statement comes out of OPEC, usually the exact opposite is what occurs, and this proves to be no different. Since that statement, oil has gone from roughly $98 a barrel to $106 a barrel, an increase of 8.16 percent in just 2½ weeks. It is a shame that we continue to rely on foreign oil in the manner that we do when we are sitting on more energy than we know what to do with (a brief disclaimer, for those claiming “peak oil”; geologists have been documenting “peak oil” since the 1930s and I’m sure some of you will claim it again … it is simply not true, but keep trying, maybe in another 70 years you will be right … but I doubt it). Here are a few facts about oil and our current energy policy that you may not have thought of before.

Fact 1: Gasoline prices are a tax. While gasoline is not a government-enforced tax unlike Social Security, income or capital gains, it functions much in the same way. For many Americans, energy is an inelastic good; it cannot be substituted and demand will remain fairly constant for that product. We need it to get to work, pick up our kids from soccer, mow the lawn, etc. Gas prices being as high as they are takes a devastating toll on the domestic economy, enriching only the oil producers in the Middle East. First of all, higher gas means higher shipping costs, and believe it or not the sellers of these goods are going to cover those costs by charging the consumers more. This is why food prices (along with an abnormal agricultural season last summer) have been abnormally high. Higher gas prices also mean that consumers have fewer dollars for discretionary spending, since a higher portion of their paychecks are going to the pumps.

Fact 2: Pursuing domestic oil would be a job creator. Just thinking off of the top of my head, in order to extract oil at home, drilling companies would need geologists and engineers to assist in extracting the oil, rig operators, companies they can contract to build the rigging equipment, and those companies would have to contract companies to get them the raw materials needed to construct. Aside from all of the manufacturing and engineering jobs associated down the line with producing and operating the equipment to extract the oil, companies would need more bodies to assist in shipping, refining, constructing pipelines such as the recently killed Keystone XL Pipeline, and tons of white collar marketing, sales and managerial positions to oversee these new projects. Those jobs are just the tip of the iceberg.

Fact 3: U.S. dependence on foreign oil is unnecessary. Estimates have shown that between the Utica Shale formation ranging from New York through eastern Ohio and the Bakken Shale formation in Montana, we have enough oil in the U.S. to relieve heavy reliance on foreign producers. By my numbers from various websites, among just Utica, Bakken and Arctic National Wildlife Refuge, we are sitting on roughly 10 billion to 15 billion barrels of oil. And that is just from three locations … not bad considering we normally as a nation consume roughly 20 million barrels of oil per day.

The sad fact of the matter is that green energy policies are keeping oil under the ground and out of the refineries. The same green energy policies that push the sales of the Chevy Volt, which burns 21.3 pounds of coal to charge its 16 kWh lithium ion battery (assuming an average of 1.3 pounds/kWh), or wind turbines that even green energy proponents don’t find economical. Many environmentalists say that fracturing is going to destroy the environment and is harmful to wildlife. Let me provide readers with a visual: A lot of the oil under the surface is not pooled. To put it best, instead of sticking a straw into a glass of water, imagine sticking a straw into a slab of concrete and being told to suck the moisture out. That is where fracturing comes in; if that concrete were broken up into smaller pieces, the moisture would be much easier to obtain. Fracturing would not result in catastrophic releases of oil into the environment as many predict.

A combination of misunderstood practices in the oil industry and pressure from green energy proponents are the sole reason for gas prices being where they are. If there was a will in this country, we could very easily have gas prices back below $2 a gallon. But it is time for a change in philosophy. Whether it be Ohio, New York, the Gulf of Mexico, ANWR or Montana, it is time to realize that we are blessed to have these resources available at our disposal, and we need to stop sending jobs and money overseas and jump start the economy right here in the United States.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a discretionary money manager with Treece Investment Advisory Corp (www.TreeceInvestments.com) and a stockbroker licensed with FINRA, working for Treece Financial Services Corp. The above information is the express opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Tags: Arctic National Wildlife Refuge, Bakken Shale formation, Ben Treece, energy policy, fracturing, green energy, oil, Utica Shale formation

This entry was posted on Friday, February 24th, 2012 at 9:34 am and is filed under Opinion.
You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.