Loren Steffy

A business blog

The fiscal cliff looms as president re-elected

Wednesday, November 7, 2012
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(AP)

(Updates market activity.)

With President Obama’s victory Tuesday night, thoughts turn to what the election means for the economy. Stocks fell the most since June as investors returned their focus to old worries: the struggling U.S. economy and the debt crisis in Europe.

The Dow Jones Industrial Average plunged 312.95 to close at 12,932.73, a decline of more than 2 percent. The Standard & Poor’s 500 Index fell 2.4 percent to 1,394.53. Treasuries rose the most in five months.

Obama’s election in 2008 prompted the biggest post-election plunge in history for the Dow. Since then, though, the gains under Obama’s presidency have marked the biggest advance for stocks and bonds in more than a decade. Now, those gains may fade  as the economic reality of what still needs to be done begins to sink in with investors.

In his acceptance speech, Obama outlined a sizable to-do list that included the deficit, tax reform, reducing oil imports and immigration reform. The most immediate issue, though, is what the president and Congress can do to avert the fiscal cliff, the $600 billion in mandated tax increases and spending cuts set to take effect at year’s end. The president’s re-election ought to give him more authority over a lame-duck Congress. Then again, it’s congressional intransigence that created the fiscal cliff in the first place.

To avoid plunging the country into another, even deeper, recession, Congress will likely have to extend at least some of the Bush-era tax cuts that are set to expire. The president has said he wants to extend them for middle- and lower-income households and allow them to expire for the wealthy, which Republicans have opposed. It’s not clear who will blink first.

The president said he intends to meet with Republican challenger Mitt Romney to discuss issues where they might have common ground.  Tax reform may be one of those areas. Romney’s proposal to reform the tax code by broadening the base and reducing loopholes and deductions, while short on specifics during the campaign, is a road map from which the president can work. Having won a second term, the president also might decide to dust off the Simpson-Bowles commission report, which calls for a similar tax overhaul.

Other big questions loom. With a second term comes a changing of the guard in the president’s Cabinet, and he’s expected to be looking for a new secretaries of treasury and energy. While Erksine Bowles has been mentioned as a Treasury secretary candidate — and he’d be a good one — the energy job is more wide open. The president’s first-term choice of Stephen Chu, a green energy supporter, proved divisive in the energy industry. One common complaint among oil companies is that there’s never been an energy secretary who’s come from the industry. That probably isn’t going to change this time around.

Meanwhile, the energy industry can expect an extension of existing policies on everything from environmental regulation to drilling on federal lands, none of which have been popular with oil companies. The re-election, though, may offer a break for wind energy companies that have been cutting jobs in the face of tax subsidies that are set to expire at year’s end.

Energy stocks posted some of the biggest declines today, led by the St. Louis-based coal company Peabody Energy, which fell $2.80, or 9.6 percent, to $26.24, and Devon Energy, an Oklahoma City oil and gas company, that slid $4.21, or 7 percent, to $55.41.

The president’s re-election also has big implications for the health-care industry. Romney had vowed to repeal the president’s healthcare reform law. Instead, the biggest changes under that law will begin to kick in during the next two years. Of course, the changes have already been priced into the market.

Some healthcare stocks also were battered today, with hospital company Humana posting one of the biggest decline on the S&P. Its shares fell $6, or 8 percent, $70.16.

Another big loser in today’s market: financial services companies. Wall Street put its money behind Romney in protest of Obama’s reforms, and it isn’t likely to fare much better now that Elizabeth Warren is in the Senate.

A big winner in Tuesday’s election was Federal Reserve Chairman Ben Bernanke. His monetary stimulus efforts have been panned by Republicans and Romney said he would replace Bernanke when his term expired in January 2014. Obama’s re-election buys time for the Fed’s latest round of quantitative easing, known as QE3, although it hasn’t been having much effect in stimulating the economy. The Fed has done all it can do. It can keep money cheap for the next few years, but the deciding factor comes back to Congress and what it decides to do.

We should get a sense of that in the coming weeks. Was Obama’s win big enough to break congressional gridlock, or are we likely to continue lurching from crisis to crisis as lawmakers and the administration bicker?

Categories: Economy, Energy, Health care

Stocks rally ahead of election results

Tuesday, November 6, 2012
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Traders aren't holding their heads today. Stocks are rising ahead of election results (Bloomberg)

Voters have to wait until this evening — or perhaps later — to find out whether to cheer or jeer the outcome of the presidential election, but investors aren’t waiting. Stocks rallied ahead of the results on hopes that the election will remove some of the uncertainty that has hovered over the market for much of the year.

The Dow Jones Industrial Average rose 133.24, or 1 percent, to 13,245.68, extending its gains for a second day.

The rally reflects voters’ hopes that with the election over, lawmakers will take steps to address the fiscal cliff, the $600 billion worth of tax increases and mandatory spending cuts set to take effect at year’s end. Worry that political divisiveness would keep Congress from acting has cast a pall over the market since mid-September.

It’s not clear, of course, that the election will usher in a more cooperative spirit in Washington. However, the economy remains the biggest issue confronting lawmakers, and without the distraction of campaigning, investors clearly hope they’ll tackle the fiscal cliff before it plunges the country back into a recession even deeper than the one that just ended.

Categories: Economy, Investing and the markets

    • Wind pool woes reveal the dangers of concentrated risk

    Friday, November 2, 2012
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    (AP)

    It’s no secret that the Texas Windstorm Insurance Association is in trouble. The coastal insurer of last resort would struggle to pay claims if Texas were hit by another major storm, in part because TWIA is still wrestling with litigated claims from Hurricane Ike. At a hearing in Austin Thursday, lawmakers questioned Insurance Commissioner Eleanor Kitzman, who said the windstorm pool will run out of cash at some point and be unable to pay future claims if the state doesn’t take action.

    Rep. John Smithee, R-Amarillo, raised the best question of the day, asking TWIA general manager John Polak if the windstorm pool, which underwrites about 60 percent of all property insurance policies in coastal counties, is telling new policy holders that it may be unable to honor the policies it’s selling. Guess what? Polak said no.

    In other words, the state is authorizing an insurance scam. If a private insurer lacked the capital to pay future claims, they wouldn’t be allowed to sell insurance in Texas.

    The windstorm pool has the authority to sell bonds to shore up its finances and cover as much as $3.5 billion in claims, but it’s not clear that it could actually sell the bonds given its sorry finances. From the time TWIA was created, the biggest fear has been that the state gets sucked into the insurance business and winds up having to guarantee TWIA coverage. We may be getting closer to that point.

    In the meantime, TWIA’s sorry situation is a reminder of the dangers of concentrated risk pools. Insurers spread risk, but in the case of Texas property insurance, there’s a lot of risk to go around. We have hailstorms, tornadoes, droughts, hurricanes, freezing weather — the size and weather variance of the market makes it expensive to cover. That’s why private insurers began to balk at coastal coverage. But the state’s solution in creating TWIA actually made the problem worse. Now, it has to spread the risk of big hurricane claims across a much smaller pool of policy holders.

    No one, of course, likes paying for someone else’s problems. In the Panhandle, policy holders don’t want to pay higher premiums because people choose to live on the coast in Hurricane Alley. Then again, we don’t like to pay to cover their hailstorms, either. But spreading that risk around means we would all pay less than we are likely to as taxpayers if we have to bail out TWIA.

    By allowing private insurers to cherry-pick their markets, lawmakers have created a narrow risk pool that concentrates losses while private insurers continue to make money from their carefully chosen markets elsewhere in the state.

    Categories: Insurance

    Oil sands deals another blow to `energy independence’

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    Oil sands mining near Fort McMurray, Alberta. (Karen Warren/Houston Chronicle)

    Rising costs and increased competition from hydraulic fracturing in the U.S. is taking its toll on investments in Canadian oil sands. The slowdown is limited so far, but it shows how quickly energy markets can change and how tenuous the idea of North American energy independence actually is.

    Suncor Energy, the biggest oil sands producer, said Thursday it’s reconsidering a plan to invest billions in upgrades as it cuts spending by 11 percent, the Wall Street Journal reported. At the same time, construction and labor costs have been rising in northern Alberta, the site of most oil sands activity. In some cases, crude from oil sands has a break even price approaching $100 a barrel, and today’s prices make those projects uneconomic.

    Like Shell Oil’s project to drill in Arctic waters, oil sands are among the most expensive sources of conventional energy in the world. Set against a global market of fluctuating prices, the high-cost production makes the dream of energy independence elusive. As oil prices fall — they’re just under $86 a barrel today — imports simply become the cheaper alternative.

    Canadian oil sand production is a key piece of most discussion about North American independence, including a plan favored by Republican presidential candidate Mitt Romney. We are unlikely to drill our way to independence by relying on domestic production alone, but we can’t count on Canadian production, either. Canada remains our biggest oil supplier, but these are expensive reserves. Counting on them as the driver of energy independence could mean the U.S. winds up paying billions more for energy when cheaper alternatives are available elsewhere.

    Achieving and maintaining energy independence sounds great, but it flies in the face of economic reality.

    Categories: Economy, Energy

    U.S. employment little changed at 7.9 percent in October

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    (AP)

    (Updates market activity.)

    The U.S. unemployment rate was essentially unchanged at 7.9 percent in October, as the economy added 171,000 jobs compared with 148,000 in September. U.S. stocks fell after the report as investors wrestled with the uncertainty of persistent unemployment, the looming “fiscal cliff” at year’s end and a presidential election just days away that remains too close to call.

    In midday trading, the Dow Jones Industrial Average slid 45.59 to 13,187.03

    The numbers were in line with predictions from economists surveyed by Bloomberg News, who  expected a rise in October unemployment to 7.9 percent from 7.8 percent. Data for jobs created in August and September were revised upward by 84,000.

    Employment growth has averaged 157,000 jobs a month so far this year, which is about the same as last year, according to the U.S. Bureau of Labor Statistics.

    This may be the most closely watched jobs report of the year, coming four days before the presidential election. The numbers, though, aren’t likely to have much impact on the outcome of the race, even though both candidates are likely to spend the next few days attempting to spin some political significance from the data.

    President Obama, for example, can say that almost 1.2 million more people are employed now than when he took office in January 2009. At the same time, Republican challenger Mitt Romney might note that there are 209,000 more people in the ranks of the unemployed.

    As Anne Lowrey points out, employers have been adding jobs at a steady pace in recent months, but it’s a sluggish pace. While consumers seem to be feeling better about the economy and are willing to spend, businesses have a growing sense of dread. Manufacturing and exports have slowed and they’re  worried about the fiscal cliff at year’s end, which could result in big tax increases. Corporate earnings were disappointing in the third quarter, as it became clear that businesses were hitting their numbers through cost-cutting, rather than growth.

    The bottom line is that job growth remains sluggish and the pace of wage gains is an anemic 1.6 percent year over year.

    “This is the slowest pace in years,” said David Doll, managing director for Houston-based Sequent Asset Management.

    Categories: Economy

    A sign the fracking craze could be cooling?

    Thursday, November 1, 2012
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    Alex Chisholm of L&M Radiator

    Many U.S. energy companies are spending more than their cash flow these days, extending the boom in hydraulic fracturing. Earlier this week, I raised the question of how much longer the spending would continue. One sign that it may be slowing comes from L&M Radiator, a company in Hibbing, Minn., that makes radiators for many of the large trucks used at well sites. L&M is one of the biggest suppliers of radiators for large trucks to both the mining and oil and gas industries.

    L&M’s Alex Chisholm was in town this week, and he shared some numbers with me. L&M is still seeing sales growth — orders from truck manufacturers continue to come in — but the pace of sales seems to be slowing. The hydraulic fracturing boom pushed L&M’s sales to the energy industry up about 32 percent for the first nine months of last year. This year, the increase is about 15 percent. Total sales to the industry are off more than $8.5 million from what they were a year earlier.

    That could be because the rate of drilling is slowing, or it could be that energy companies are finding they have all the trucks they need. Either way, some large oilfield service companies have scaled back orders in recent months. Just as we’ve seen lower prices affecting earnings at large energy companies such as Shell and Exxon Mobil, the slowdown in orders for fracking truck radiators at L&M could be another sign of how weak prices for natural gas are rippling through the economy.

    Categories: Autos, Economy, Energy

    How big money is corrupting politics

    Wednesday, October 31, 2012
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    Watch Big Sky, Big Money on PBS. See more from FRONTLINE.

    This week’s episode of Frontline looks at several races in Montana to examine money in politics following the Supreme Court’s Citizens United ruling and the Montana court ruling that unsuccessfully challenged that decision. While it’s not surprising that big money is pouring into local elections and beating back state anti-corruptions, what struck me was the complete lack of transparency. Donors no longer have to have any accountability for their actions. It’s like Internet screen names for campaign contributions.

    Categories: General, Legal, Video

    A fiscal cliff for energy stocks?

    Tuesday, October 30, 2012
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    (AP)

    While the country faces the prospect of higher taxes and deep spending cuts at year’s end, many energy companies that engage in hydraulic fracturing in shale formations are struggling with spending budgets that outweigh production growth. The most glaring example, of course, is Chesapeake Energy, which has been selling assets to pay down debt. But weaker natural gas prices has created a similar funding conundrum at other energy companies, too.

    As study last month by Guggenheim Securities found that spending on drilling programs exceeded cash flow by an average of 43 percent among onshore U.S. drilling companies, TheStreet.com reported. As the third quarter results begin to come in, analysts are predicting a 2 percent production decline from the previous quarter, and they’re looking for similar declines at year’s end. The decline in production — and earnings because of weaker prices — hasn’t curbed spending for new drilling, which is expected to rise at more than 10 percent.

    Companies that rein in capital spending, though, face steeper production and profit declines in the coming years. Some companies, of course, will make up for the gap by buying back shares, which has become a common solution for masking the prospect of falling reserve replacement.

    As we trot around terms like “energy independence” this election season, it’s worth noting what’s happening on energy company balance sheets. Their spending, like country’s, isn’t sustainable. The real roadblock for energy independence isn’t just access to resources, it’s economics.

    Categories: Energy