Just Kidding

Jim Brown
 
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Brent crude rose Sunday night to $109 after Libyan rebels refused to open the countries eastern ports. The speculation last week was a weekend reopening after the Libyan military warned of consequences. Apparently the rebels were just kidding when they said the ports would be released.

The ports have been closed since July as workers went on strike and the rebels rejected the government's demands. This weekend Ibrahim al-Jedran, a Libyan rebel leader, told a news conference the ports would remain shut after the government rejected the rebels conditions for releasing their stranglehold.

Libyan production has fallen to 210,000 bpd and the lowest since 2011. Libya produced an average of 1.55 mbpd in 2010 before the civil war. There were plans in place to increase that to 2.0 mbpd but the exodus of foreign workers and the tribal strife following the overthrow of Gaddafi has put an end to those goals. Currently they are exporting about 110,000 bpd through five terminals under government control.

The military warned of layoffs and the end to government salaries and payments if the ports were not reopened. The government of Libya can't pay its bills without the revenue from the oil. We can expect some military interdiction soon to reopen the ports.

Anadarko Petroleum

Anadarko Petroleum (APC) received an unwelcome surprise last week when a judge ruled they were liable for a fraudulent transfer of assets from Kerr-McGee in 2006. Anadarko bought the energy assets of Kerr-McGee in 2006 and went about its business. However, a prior spinoff of Kerr-McGee in 2005, Tronox, filed bankruptcy claiming Kerr-McGee set them up to fail by packaging all their EPA problems in the assets included in the Tronox spinoff. Tronox wound up faced with cleanup charges for sites that had been closed for decades and held by previous owners. Companies Kerr-McGee had purchased in the past.

Tronox sued Kerr-McGee for fraudulently transferring all the bad assets to Tronox so Kerr-McGee could then sell the good assets to Anadarko several months later. After years in court the judge agreed and said because the assets transferred to Anadarko had implied liabilities Anadarko could be liable for $5 to $14 billion in damages. Anadarko had been so confident the acquisition from Kerr-McGee was clean they had not made any loss reserves on the outcome of the court battle.

Anadarko said they "vehemently" disagreed with the court's decision and would use every method possible to fight the decision. Since the case is not over and all parties have months to submit claims and counter claims on the final judgment amount it could be over a year just to get a final number and the conclusion of the current court case. An aggressive appeal by Anadarko could take ten years to wander through the court system. Anadarko shares declined from $84 to $72 on the news before rebounding to close at $78 on Friday. Several analysts recommended a buy at this level but I would rather wait a few days to see if the rebound will stick.

Gold

Analysts expect gold prices to rally in January after the largest amount of selling in a decade in 2013. Share levels in ETFs like the GLD have returned to 2006 levels with monthly outflows of 40.7 tons per month since June.

Fund managers normally sell gold in December. When stocks are in rally mode and there are no crises on the horizon they don't want to be seen as hoarding gold for a rainy day. They can sell their gold positions to offset the taxable gains on stocks.

When the New Year rolls around and a new set of geopolitical problems appears they tend to begin adding gold back as a hedge against the unknown. With China causing trouble in the South China Sea and North Korea executing high ranking family members and their staff there is always a risk to equities.

If the Fed does announce a taper next week the dollar should strengthen and that would be short term negative for gold prices.

However, miners are writing down reserves and deciding which mines to close. It makes no sense to mine gold and pay taxes and royalties only to sell it for a loss. By reducing capacity they support prices long term.

The weak holders are already out of gold. The retail investors left a long time ago and only the institutional holders and traders are currently invested. This means any appreciable bounce in the yellow metal will attract investors like flies to a picnic.

While I don't believe gold will rebound significantly until inflation returns or a war breaks out I do believe the worst is over. There are analysts with price targets in the $1,100 range and there are those with irrational targets at $600. Since it costs more than $600 to get it out of the ground and refined I seriously doubt we will see that price.

I would be a buyer on any further dips in 2013 for an early 2014 trade.

Market

The markets appear to have found support with the Nasdaq holding 4,000 for two days and the Russell 2000 holding 1,100 for three days. The S&P held 1,775 but the Dow is still the weakest index.

Analysts blame this on tax loss selling and fear of the Fed. If the Fed does announce a taper on Wednesday we can expect further losses even though the actual impact to the markets from a $10 billion cut would be negligible. It is the sentiment that counts and the first taper is the signal of more to come.

We could be at the point where investors are willing to take a chance ahead of the FOMC meeting. If those levels I listed above continue to hold we could see traders becoming more aggressively bullish.

Jim Brown

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