More Fiscal Cliff Woes, LNG and Operation Twist

by Shawn Narancich, CFA Vice President of Research

Marking Time

In a week when investors were expecting the monthly jobs and manufacturing reports to reflect Hurricane Sandy disruptions, weather wasn’t blamed for the disappointingly low level of manufacturing activity, nor did it seem to hinder the surprisingly strong payroll report. While a net gain of 146,000 jobs in November was a pleasant surprise, the unemployment rate fell for the wrong reason. A four-year low of 7.7 percent resulted from an estimated 350,000 people dropping out of the labor force, as discouraged job seekers stopped searching for work. In manufacturing, the storm that blew through was not produced by Mother Nature, but rather by the politicians in Washington who still have yet to resolve the “fiscal cliff.” As businesses hunker down, they are ordering less and hiring fewer. Against this mixed backdrop of economic indicators, stocks and bonds finished the week largely unchanged.

LNG Boosters Receive Key Endorsement

Natural gas also failed to advance despite the results of a widely anticipated report from an economic consulting firm that supports the case for liquefied natural gas (LNG) exports.  Free market advocates cheered the Department of Energy-commissioned study concluding that LNG exports would boost economic output and create jobs without a disproportionate increase in prices. Environmental reviews of such exports are still ongoing, and while the DOE won’t decide on permitting until the first half of next year, this week’s report is a key input to the agency’s ultimate decision. Despite the potential demand boost from natural gas exports, the commodity succumbed to selling pressure on Friday because forecasts are predicting warmer than normal weather that threatens to reduce seasonal heating demand. Following last year’s winter that wasn’t, traders are keeping prices under wraps as they weigh increasing industrial demand for gas with evidence that supply from curtailed drilling will soon impact production levels.

Strategic Flip-Flop

Sticking with an energy theme, the shale bonanza that first sent natural gas prices plummeting had a similar but much more immediate impact on Freeport-McMoran’s stock, which cratered on news that it would purchase Plains Exploration and the portion of McMoran Exploration that it doesn’t already own. After making a decision in the early 1990s to ditch the energy business in favor of its bread-and-butter copper and gold mines, management shocked investors by announcing the twin deals worth a combined $20 billion. Investors fled the stock in droves, sending the large-cap miner’s stock down over 20 percent for the week. As if the strategic about-face wasn’t enough, eyebrows were raised further upon revelation that Freeport’s CEO owns material positions in both Plains and McMoran, and that neither deal is subject to shareholder approval. The end result is that Freeport goes from being a pure-play miner to a BHP Billiton-like natural resources conglomerate, with a balance sheet burdened with five times as much debt.

On tap next week is the Federal Reserve’s last meeting of the year, at which investors hope to learn what kind of encore might await the end of Bernanke and Co.’s bond buying and selling program, dubbed “Operation Twist.” Expectations are that the Fed will continue buying long-term Treasuries to keep rates low, without sterililzing those purchases with sales of other securities. If so, monetary policy is set to become even more stimulative.

Our Takeaways from the Week

  • Fiscal cliff uncertainty continues “ad nauseum” as markets await resolution
  •  Odds of LNG export approval increased as a key study highlighted the potential economic benefits