A new California exclusive: limits on TV sales

The California Energy Commission unanimously approved a proposed regulation today capping the power consumption of televisions sold in California, starting in 2011. The Opinion L.A. blog has a wordier rundown of the potential winners and losers; I'll just note here that the rules won't have any impact on the models in stores now, and probably not on the ones that hit the shelves next year, either. That's because it takes more than a year to design and engineer the typical set. Oh and yes, judging from the saber-rattling by the Consumer Electronics Assn. this afternoon, I expect that the rules will be challenged in court long before they take effect.

-- Jon Healey

Healey writes editorials for The Times' Opinion Manufacturing Division. Follow him on Twitter: @jcahealey

The Nightmare Portfolio of 2009

Is it possible for an investor to be losing money in financial markets this year?

With an incredible amount of bad timing and wrong-headed conviction, you actually could have constructed a portfolio on Jan. 1 that would be deep in the red by now -- even as most stocks, bonds and commodities have rallied sharply.

Basically, if you bet heavily at the start of the year on some version of economic and market Armageddon unfolding in 2009 -- and you’ve refused to budge from that bet -- you probably are in a world of hurt.

Though I concede the year isn’t over, and it’s possible that financial Armageddon has only been deferred, here's my idea of the Nightmare Portfolio of 2009:

--- A long-term Treasury bond fund. As 2008 ended Treasury yields had plunged to near-record lows as some investors flocked to the relative safety of government bonds, fearing that the worst was yet to come for the economy and the financial system.

Bad move: Treasury yields began to rebound with the turn of the calendar to January, as the market focused less on the economic meltdown that was in progress and more on Uncle Sam’s massive borrowing needs. When yields go up, bond prices drop.

The 30-year T-bond yield, which fell as low as 2.52% in December, now is at 4.26%. The average total return for long-term T-bond mutual funds this year, according to Morningstar Inc.: a negative 11.6%, as the plunge in bond prices has more than wiped out interest earnings.

--- A bear-market stock fund. With the Standard & Poor’s 500 index down 38% in 2008, and the worst of the recession clearly ahead as 2009 dawned, bear-market funds had huge appeal as portfolio hedges. By using derivative securities or "short selling" strategies the funds are designed to gain if share prices slump.

That continued to be the right market bet -- until stocks hit bottom in early March, turned up, and, so far, haven’t looked back. The average total return of bear market funds year-to-date: a negative 32.3%, compared with the positive 20.5% return of the S&P 500.

--- A strong-dollar fund. If you expected the global financial system to fly apart in 2009 it would have made sense to bet on the dollar rallying, figuring that investors would turn back to the world’s premier currency as a haven. In fact, the greenback rose sharply in January and February as fears of calamity mushroomed.

But once stock markets began to snap back in March the dollar’s allure faded as global investors began to reach for risk again. This month the buck is sliding anew, deepening the losses of funds that bet on dollar strength. Case in point: The Pro-Funds Rising U.S. Dollar fund now is down 9.1% for the year.

--- A natural gas fund. Specifically, the U.S. Natural Gas exchange-traded fund (ticker: UNG). Who knew that, despite the resurgence of crude oil prices this year, natural gas prices would continue to plummet -- to 7 1/2 year lows by early this month?

But there may be hope: Even amid a continuing glut of gas and weak industrial demand, gas futures prices have rebounded 48% since Sept. 3, and the UNG fund is up 30% since then. That may not be much comfort to investors who bought in late last year or early this year, however: The fund still is off 49% year to date.

-- Tom Petruno

Image: The soundtrack from the 1998 movie. (The world was saved in that version, too.)

 

S&P warns Mexico on debt rating as oil revenue falls

The Mexican peso is sliding against the dollar for a sixth straight session today after Standard & Poor’s warned that it might cut the country’s credit rating.

From Bloomberg News:

Mexican President Felipe Calderon must create new sources of revenue to offset declining oil income if the country is to avoid a downgrade of its debt rating, Standard & Poor’s analyst Lisa Schineller said.

S&P may cut Mexico’s BBB-plus status before the end of the year, depending on how Calderon and legislators address ways to boost tax collection when they discuss the 2010 budget next week, Schineller said in an interview. That’s more important in assessing the country’s capacity to pay debt than any increase in the budget deficit, which economists say may widen to 3.5% of gross domestic product from 3% this year.

"It’s the concept of strengthening the medium-term revenue base in a permanent manner that can generate revenue to help offset the decline in oil revenue over the coming years," Schineller said in a telephone interview from New York.

Mexico’s contracting economy, a 50% drop in oil prices over the last year and declining production by the state oil monopoly have exposed lawmakers’ failure to raise taxes and reduce dependence on petroleum for 40% of revenue. S&P wants Mexico to address this without resorting to temporary measures aimed at getting it through next year, Schineller said.

Mexico’s rating, at BBB-plus, still is considered investment grade. A rating of BB or lower would push the country to "junk" credit status.

Concerns about the ballooning budget deficit have weighed on the peso in recent days. It eased today to 13.34 to the dollar, down from 13.25 on Friday and down from 12.83 on Aug. 21, which was its best level against the buck since November.

The peso still is in far stronger shape than in early March, when it fell to a record low of 15.57 per dollar amid the final stage of the winter plunge in global financial markets.

-- Tom Petruno

Photo: Mexican President Felipe Calderon. Credit: Fernando Bizerra Jr. / European Pressphoto Agency

Australia OKs Chevron's plans for huge gas field

Australia has given the green light to Chevron Corp.’s plans for a major natural gas production and liquefaction project off the country’s northwest coast.

The development of the Greater Gorgon fields is expected to provide huge quantities of liquefied gas for export to China and other Asian nations.

From Bloomberg News:

Environmental approval has been granted with an additional 28 conditions, Peter Garrett, federal environment minister, told reporters in Canberra today [Wednesday]. The ruling was among the final obstacles before Chevron, Royal Dutch Shell and Exxon Mobil Corp. can make a decision to build the venture.

Gorgon is among more than 12 liquefied natural gas projects proposed for Australia and Papua New Guinea competing for Asian buyers.

San Ramon, Calif.-based Chevron is the operator of the project and has a 50% interest; Royal Dutch and ExxonMobil each have a 25% stake.

Australian Prime Minister Kevin Rudd has estimated that the value of gas sales from the Gorgon fields could total $249 billion (U.S.) over 20 years. Chevron calls Gorgon Australia's single largest natural resources project.

ExxonMobil this month signed deals to sell much of its share of Gorgon production to Asian importers including PetroChina Co. and India’s Petronet LNG Ltd.

Chevron’s shares have rallied from a 2009 low of $56.46 on March 5. The stock slipped 11 cents to $70.65 on Tuesday.

Just an FYI for income-oriented investors: Major energy stocks have been sources of rising dividend income this year even as many other companies have slashed payouts because of slumping profit. Chevron raised its quarterly dividend 4.6% last month, to 68 cents a share from 65 cents.

The stock’s annualized dividend yield is 3.8%, based on Tuesday’s price.

-- Tom Petruno

Photo: A liquefied natural gas transport ship off Yokohama City, Japan. Credit: Kimimasa Mayama / Bloomberg News

Oil could be setting an inflation time bomb for autumn

With oil prices back above $73 a barrel, anyone who regularly fills a gas tank has to be hoping that this isn’t the start of a new surge.

Carl Weinberg, chief economist at High Frequency Economics, says there’s a reason beyond the personal pocketbook issue to worry about another jump in oil prices: The effect on inflation gauges worldwide.

Although crude is up from $34 a barrel in December, it’s still far below its peak prices of a year ago, when it topped out at $145 a barrel on July 3, 2008. The year-over-year drop has continued to put downward pressure on the U.S. Consumer Price Index and other inflation measures around the globe.

In July, for example, the energy component of the CPI was down 28% from a year earlier. That pulled the overall CPI down 2.1% -- the biggest 12-month drop since 1950 -- even though many other costs have continued to rise despite the recession.

Oil's drop more than offset the 3.2% year-over-year increase in medical care costs, and the 1.1% rise in food and beverage costs.

But oil’s beneficial effect on the CPI stands to end this fall, because crude and other commodities began to collapse last September amid the financial-system meltdown.

Oil fell from $115 a barrel at the end of last August to $100 by the end of September, $68 by the end of October and $54 by Nov. 30.

Now, if the price stays at $73 or goes higher, and gasoline follows suit, energy prices will begin to put upward pressure on the CPI by October.

"While the pass-through of higher oil prices into consumer prices may be less than 100%, no one should treat the risk of a substantial increase in perceived inflation by year-end as anything but a serious threat to both consumer demand and to economic growth," Weinberg wrote in a report this week.

He worries that, if financial markets believe that inflation is gaining traction, long-term interest rates could rise sharply, threatening to abort any economic recovery.

In theory, markets shouldn't be fooled: They know enough to look at the "core" inflation rate (CPI excluding food and energy costs) as well as the "headline" number of the overall index.

But what Weinberg fears is that a rising headline number, because of oil, might create its own reality, and could even drive central banks to begin tightening credit in the face of a still dangerously weak economy.

I suppose it could happen. But I think most people would prefer that oil prices stay down for the obvious reason: Higher gasoline prices are a financial drain that most struggling consumers just can't afford.

-- Tom Petruno

Photo: Filling up a year ago. Credit: Brian Vander Brug / Los Angeles Times

Wall Street bears lacking firepower despite help from China, oil

China's renewed stock market selloff this week and crude oil's surprising surge might otherwise have been excellent excuses for a pullback on Wall Street.

Except that it's August, and there might not be enough engaged human investors in the market to care.

"The market should be starting to correct, but it's not going to correct because there's no one around to sell," says Dave Rovelli, head of equity trading at Canaccord Adams in Boston.

That's hyperbole, of course. Yet despite some volatile sessions in the last couple of weeks, major U.S.  market indexes are about where they were when the month began, and haven't lost much from their recent highs.

The Standard & Poor's 500, at 996.46 on Wednesday, was off a mere 0.6% from its close of 1,002.63 on Aug. 3.

So the lucky ranks of investors who've fled to the beaches, mountains or their own backyards this month haven't missed much of anything by not paying attention to the market.

It could have been worse given mounting warning signs of a near-term peak in share prices, including a sharp jump in bullish sentiment in the first half of the month.

Then, when China's hot market began to tumble, it seemed to be a logical bell-ringer for markets worldwide after July's big gains.

China may yet turn out to be a harbinger of trouble for global stocks. But the Shanghai market mostly traveled alone in its 19.8% plunge from Aug. 4 through Wednesday. (It regained 4.5% on Thursday.)

Measured from its nine-month high reached on Aug. 13, the S&P 500 was down just 3.3% through Monday's close, before rebounding 1% on Tuesday and 0.7% on Wednesday.

Among other markets, the pullbacks this month have been no worse than 4.7% in Germany, 3.7% in Japan and 3.6% in Mexico.

Outside of China, stock bulls and bears may have reached a kind of stalemate for the moment, waiting for more signs of economic recovery -- or of renewed weakness.

Is oil pointing to the former? Crude futures in New York rocketed $3.02 a barrel on Wednesday to finish at $72.21 after the government reported a steep drop in U.S. inventories last week, suggesting tightening supplies.

But analysts were at a loss to explain the size of the shortfall. "There was no story to justify it," said Stephen Schork, an energy analyst in Villanova, Pa. That didn't stop traders from pushing oil to just below its 2009 high of $72.68 a barrel reached in mid-June.

Technical trading factors may overtake the fundamentals if oil-price optimists can get futures above $75, Schork said. "$75 is the number the permabulls want to gun for," he said. Reaching that level could trigger short-covering by market bears that could quickly get the price to $80 or even $85, he said.

The stock market clearly isn't worried about oil at $72 a barrel, and may even take encouragement from it. But the trend at the gas pump is going the wrong way for any investor who's concerned about the financial health of cash-strapped consumers and their ability to help spend the economy into a lasting recovery.

It may just take until September to get enough people back on Wall Street to think it all through.

-- Tom Petruno

 

The 'good' deflation: Natural gas prices at 7-year low

More of the kind of deflation the economy needs: Natural gas prices fell to seven-year lows Tuesday.

Near-term futures prices in New York slid 7 cents, or 2.1%, to $3.10 per million British thermal units -- the ninth straight decline and the lowest price since Aug. 2002.

While crude oil prices have jumped 55% this year, to $69.19 a barrel as of Tuesday, natural gas has plunged 45%.

The gas price is down 77% from the 2 1/2-year high of $13.58 per million BTUs reached on July 3, 2008, amid the last gasp of the speculative frenzy for commodities early that summer.

The problem for gas producers -- and advantage for consumers -- is ballooning supply, as the recession has slashed industrial gas use.

From Bloomberg News:

Gas stockpiles rose 63 billion cubic feet in the week ended Aug. 7 to 3.152 trillion cubic feet, the Energy Department said. The inventory surplus to the five-year average was about 20%.

"Brimming storage remains a problem," Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York, said in a note to clients. "There are already over 3 trillion cubic feet in the ground, levels usually not seen until late September."

Hurricane Bill, the first of the Atlantic season, and two other tropical disturbances have stayed away from energy-producing regions of the Gulf of Mexico, which pressured prices lower, Fitzpatrick said.

With ample storage, the hurricane hasn’t compelled investors to buy natural gas as a hedge against production disruptions, said Cameron Horwitz, an analyst at SunTrust Robinson Humphrey in Houston.

"Not when you have storage at 600 billion cubic feet above last year," he said. "It will take a huge disturbance to get natural gas to take off. That’s a lot of gas to burn off."

What’s more, as the Wall Street Journal points out, rising gas production in U.S. regions away from the Gulf of Mexico has become another depressant on prices.

From the Journal:

In recent years, when the Gulf represented a fifth of the U.S. gas production and markets were strained, any threat of storms could send prices soaring. But gas output from the Gulf now accounts for about 11% of domestic supply as producers have increasingly moved on shore to tap gas-rich formations known as shales, putting less supply in the path of storms and boosting overall output from these new fields.

--  Tom Petruno

Photo: A gas well near Columbus, Texas. Credit: Scott Dalton / Bloomberg News

CFTC chairman sees need to restrict oil speculators

The new head of the Commodity Futures Trading Commission today signaled a fresh push to rein-in oil market speculators.

Opening three days of hearings on the issue of whether to limit trading activity in energy futures contracts, CFTC Chairman Gary Gensler said the agency should take the view that "every option must be on the table" to deal with "excessive speculation."

From Reuters:

The CFTC, regulator of U.S. futures markets, is reviewing how to limit how many futures contracts can be held, so-called position limits, and if some traders should be allowed to exceed those limits.

"I believe we must seriously consider setting strict position limits in the energy markets," said Gensler.

He said several questions remain that the CFTC must still answer, including what the position limits should be; who should set them, the CFTC or the exchange; and if exemptions should be allowed for traders to manage purely financial risk, rather than accepting the delivery of the actual commodity.

Several commissioners warned that the CFTC must be cautious. But, at the same time, Commissioner Bart Chilton said the "unprecedented volatility" over the past year had increased the urgency for the CFTC to make changes. "Whatever manner the agency proceeds, 'going slow' is not an option," he said.

The CFTC plans to issue a report next month that will pin much of the blame for oil prices’ wild volatility in 2008 on speculators piling into the market, the Wall Street Journal reported today.

An initial CFTC report last year on the oil price surge and crash had said that basic supply and demand was responsible for the swings in crude. But Gensler, appointed by President Obama in May, didn’t buy that explanation.

Oil rocketed from $96 a barrel at the end of 2007 to a record $145 by early July 2008. The price then crashed as low as $34 by December with the worldwide meltdown in financial markets.

This year oil has rebounded again amid signs that the global recession is easing. Near-term futures were down $1.41 to $66.97 a barrel at about noon PDT today.

-- Tom Petruno

Photo: CFTC Chairman Gary Gensler. Credit: Susan Walsh / Associated Press

Gasoline tax hike proponents find an unlikely ally

Strange days on the Potomac: The U.S. Chamber of Commerce is pounding the table for a tax increase.

The chamber this week came out fighting for higher federal excise taxes on gasoline at the pump, saying the move was necessary to provide funding needed for highways, bridges and public transportation systems.

"Unless we make a serious financial commitment now, our infrastructure will continue to crumble around us, threatening our safety, mobility, and global competitiveness," Chamber President Tom Donohue said in a letter on the organization's website. "The simplest, most straightforward way to raise money is through a modest increase in gasoline and diesel taxes."

This tax increase idea is easier for the chamber to swallow, Donohue said, because "fuel taxes are different -- they are user fees."

But that still isn't an easy sell with some in Congress, Alec MacGillis at the Washington Post writes:

"The White House has signaled that, busy as it is with health care, climate change and other issues, it wants to delay for 18 months the looming question of how the country should pay for its transportation infrastructure. The 18.4 cent-per-gallon federal gasoline tax has not been increased since 1993 and, as inflation progresses and people switch to more efficient cars, the tax is increasingly unable to cover the country's highway, bridge and public transit needs.

"House Democrats have drafted a $500 billion six-year transportation bill to replace the six-year plan that expires this fall, but the White House would rather extend the current spending plan using general revenues, rather than have the hard discussion over whether to raise the gas tax."

Donohue told the Post that the chamber supports a gas tax increase of around 10 cents a gallon immediately, followed by annual increases of about 5 cents for the next few years and then a rate of increase indexed to inflation.

"After 15, 16 years of not having an increase in the federal fuel tax, it is time to do that," Donohue said. "It's just a small amount of the money that will be needed over time. Fuel prices are back down pretty much. . . .Do it! Just damn do it. You've got a window of opportunity now."

-- Tom Petruno

Photo credit: Frederic J. Brown / AFP /Getty Images

California: A 'permanently smaller' economy?

Not that anyone in California should need more sobering-up about the state's economic outlook, but the scenario painted by blogger Gregor Macdonald, who describes himself as a veteran oil analyst and energy investor, is particularly stark.

In a summary of his piece titled "The Scholarship of Collapse," he writes:

"Without the two industries that characterized post-war growth in the U.S., housing and automobiles (and the financial industry that squatted on top of these) it’s hard to see how California -- and the U.S. by extension -- does not become a permanently smaller economy.

"I now foresee zero net physical infrastructure or housing growth in California for at least another 5 years. If housing units go up somewhere in California, they’ll be bulldozed someplace else. If new roads or highways are erected, they’ll be discontinued or dismantled somewhere else. Without California, there will be no sustainable U.S. GDP growth."

I’m not convinced that the U.S. can’t grow without growth in California. Texans probably had similar thoughts when their mini-Depression began in the mid-1980s, with the collapse of oil prices and real estate values. But obviously the long workout ahead for California will weigh on U.S. growth.

In a broader view, Macdonald sees California as emblematic of the tipping point faced by the U.S. economy overall:

"The United States, just like California, now sits astride massive, gargantuan post-war infrastructure that was built with cheap energy and leveraged with cheap energy, for over 50 years. . . . To make matters worse, the federal government is in the midst of one of the largest policy mistakes in U.S. history as it has chosen to make enormous new investments in car companies, cars, biofuels, roads, and highways to the exclusion of public transport. This is a classic, textbook example of the sunk cost effect in decision making and is a hallmark of the collapsed societies of antiquity."

-- Tom Petruno