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In the Headlines-December 19th, 2014

In The Headlines

Oil Shale Producers Turn the Tables on OPEC

Saudi Arabia and its fellow members in the Organization of the Petroleum Exporting Countries (OPEC) are stressed out. Producers of oil from shale are driving down the world price of crude by flooding the market with millions of barrels of new oil each day. At $64 a barrel, Brent crude is down 44% since June. All OPEC can do is gape at the falling price of crude and contemplate the destruction of their cartel at the hands of the Americans, whom they thought they had supplanted as the world’s leading oil producers for good 40 years ago. Energy economist Philip Verleger says shale is to OPEC what the Apple II was to the IBM mainframe.

Theories as to why OPEC did not reduce quotas at its recent meeting in Vienna are as cheap and abundant as crude oil has now become in North Dakota. One such theory holds that the Sunnis of Saudi Arabia want to hurt the Shiites of Iran, who need high-priced oil to finance their government. Another, expressed by Russian President Vladimir Putin, is that the whole thing is a conspiracy to undermine Russia, the world’s biggest oil producer. Yet another is that the Saudis hope to drive oil prices below where it makes sense for American shale producers to invest in new production. But shale producers have lowered their costs so much that in key fields they can make profits at $50 to $70 a barrel. That is above core OPEC members’ exploration and production costs but below what many need to cover their government spending.

In fact, prices are being forced down not by any action (or inaction) of the Saudis, but by the American shale producers, who are simply producing all the oil they can to maximize their profits. Each operator is so small, it can increase production without pushing down the market price. Because shale wells are short-lived, producers do not have to plan far ahead, says Karr Ingham, a petroleum economist in Amarillo, Texas. Singly the shale producers are inconsequential. Collectively, their breakneck production is damaging OPEC.

OPEC used to be something to reckon with, and for a brief period in the 1970s, its influence was so strong that it could set prices to the penny for scores of crudes, says Bhushan Bahree, senior director for OPEC Middle East research at market researcher HIS. Its power has waned considerably, but until this year Saudi Arabia could still be counted on to cut output for the good of the cartel when gluts emerged. The Saudi refusal to do so last month is historic, says Michael Wittner, head of oil research at Société Générale in New York. “That is such a tremendous, dramatic change,” he says. “It’s hard to think of a way to exaggerate how fundamental it is.”

Given oil’s chronic volatility, it would be a mistake to count OPEC out for good. The glut that is undermining the cartel today will set the stage for future shortages that could restore its influence. Cheap oil from shale already shows signs of disrupting investment in costlier technologies. Rystad Energy, a Norwegian consulting firm, estimates that oil averaging $60 a barrel next year would lead to the delay or cancellation of one-third of all oil and gas projects slated for go-aheads in 2015, mainly higher-cost investments in the Alberta oil sands, the Arctic, Brazil, West Africa, and the North Sea.

However, as night follows day, scrapping such projects will lead to shortages and a price spike. Untamed oil is “…in a continuous boom-bust cycle,” says Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin.
The U.S. is in a good place at the moment. In international affairs it often plays the galumphing giant bedeviled by small, nimble foes. With shale oil, it is the American upstarts who are small and nimble. According to the International Energy Agency in its latest monthly report, “it is increasingly clear that we have begun a new chapter in the history of the oil markets.”


West Elm Blends the Best of Online and Offline Shopping

By aligning its online and offline sales, West Elm has become a surprising e-commerce star. American consumers are expected to rack up a whopping $61 billion credit card bill for online retail sales this holiday season—a record, according to internet data firm ComScore, and a 16% climb over last year.

Few chains are better positioned to reap the rewards than West Elm. The home decor and furniture brand is the fastest-growing division of parent company Williams-Sonoma, which saw an astonishing 51% of its sales come from e-commerce last quarter. The company pulled in just $4.4 billion in fiscal 2013 revenue but was ranked the 21st-largest online retailer in North America by Internet Retailer Magazine. Gap, with nearly four times the revenue, was No. 19.

To hit that kind of online-offline split, West Elm’s management had to persuade store managers to buy into the benefits of the web—no easy task when online purchases are often viewed as stealing precious sales per square foot from brick-and-mortar stores. So it began incorporating new metrics to judge store performance. By tracking customers’ zip codes, for example, store managers are now acknowledged for online sales placed in their vicinity. It is good sense. A large share of purchases originate in-store but are completed online—say, if you go in to browse for a sofa but want to consult with a significant other before taking the plunge.

“There was tremendous pressure to deliver on the sale on the day when the customer was in there,” says Vanessa Holden, West Elm’s creative director. “Now we’re really giving the associates credit for and ownership of relationships that don’t entirely happen within their four walls.”

The interplay between West Elm’s physical and virtual stores starts at the very beginning of the process: picking a new site. This year the brand opened 11 brick-and-mortar stores, placed and stocked with consideration of the behavior of nearby online customers.

In the college town of Durham, N.C., demographic data suggested that West Elm should expect a younger shopper seeking a contemporary look. A few months in, the store was not living up to its potential. “We took a more surgical look at what the direct-to-consumer information was telling us,” Holden says. “It told a really different story.” Online sales revealed a preference for traditional, not modern, pieces—a reflection of the state’s role as the birthplace of American furniture. The local team revisited the store’s offerings and sales rebounded.

Before, “store managers knew what their customers looked like walking in,” Holden says, “but they did not have a good view of them once they walked out.” West Elm’s synthesis of online and offline means that is no longer the case.

Citations
1. http://buswk.co/1AxOU5M – BusinessWeek
2. http://for.tn/1BFHCOm – Fortune


The Good News Is . . .

• Retail sales in November posted a 0.7% gain after rebounding 0.5% in October. Autos jumped a strong 1.7% after gaining 0.8% in October. The strength in the retail sector was broad based, led by building materials and garden equipment (up 1.4%); clothing & accessories (up 1.2%); and non-store retailers (up 1.0%). Today’s retail sales report is favorable for fourth quarter gross domestic product (GDP) in the personal consumption component. Currently, the consumer sector is leading the recovery with both consumer confidence and spending up.

• Tyson Foods Inc., one of the world’s largest processors and marketers of chicken, beef and pork, reported earnings of $0.87 per share, an increase of 24.3% over year-ago earnings of $0.70. The firm’s earnings topped the consensus estimate of analysts by $0.11. The company reported revenues of $10.1 billion, an increase of 13.6%. Management attributed the company’s results to strong demand for it chicken products and the prepared foods lines it gained as part of its acquisition of Hillshire Brands.

• Merck & Company announced that it agreed to acquire Cubist Pharmaceuticals for $8.4 billion, plus the assumption of $1.1 billion in debt. The deal will give Merck, the second-largest American drug maker after Pfizer, control of the largest antibiotics company, and deepen its ties with hospitals. Cubist makes drugs to treat dangerous bacteria and superbugs, including diseases that can cause pandemics. Drug makers are showing renewed interest in antibiotics now that the Food and Drug Administration is offering incentives to manufacturers to invest in new products. Companies that develop antibiotics can now qualify for speedier approvals and can sell their products exclusively for longer periods as part of an effort to combat the growing problem of antibiotic-resistant diseases.

Citations
1. http://bloom.bg/1bidM2T – Bloomberg
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1qPijZf – Tyson Foods Inc.
4. http://nyti.ms/1vFKmuB – NY Times Dealbook


Planning Tips

Tips for Using Digital Gift Cards

Many retailers, both of the online and brick and mortar variety, offer consumers gift cards as a way to shop or give money to friends. There are two types of gift cards: physical and digital, each of which comes with a variety of features and benefits. Some retailers, such as Amazon and Applebee’s, allow consumers to purchase digital gift cards which may be redeemed online or printed at home into usable gift cards. Below are some of the pros and cons associated with digital gift cards.

Convenience and safety – Gift cards may be good for those who are concerned with losing cash. Digital gift cards are not generally replaceable, but they are very difficult to lose. Physical gift cards usually need to be registered in order to provide a level of protection in the event of loss. Once they are registered, most are easily replaced.

Good way to control spending – Digital gift cards are useful for controlling and monitoring the spending of younger shoppers by limiting amounts and restricting the locations where the card may be used. They also make great gifts.

Unused balances – A problem common to all gift cards purchased in denominations is that after purchases are made there may be small balances left, which consumers either forget about or cannot be bothered to use. Retailers have recognized this trend and used it to get extra value out of gift cards.

Potential for hidden fees – Most gift cards do not have time limits. Some allow you to reload, which means this “wasted-small balance” aspect of gift cards is not present. However, there are often fees associated with transactions like this. Reloadable cards are more likely to carry monthly charges as well.

Limited benefits compared to credit cards – Prepaid credit cards, debit cards and gift cards that are reloadable generally offer better value than retailer-specific gift cards. However, the fees and associated benefits available with prepaid credit cards are generally not as favorable as those of traditional credit cards. For example, prepaid credit cards do not typically offer travel rewards or car insurance coverage, as traditional credit cards do.

Citations
1. http://aol.it/1IRdK6D – Daily Finance
2. http://bit.ly/1uKvg31 – GetRichSlowly.com
3. http://bit.ly/1uGxPlz – Investopedia
4. http://bit.ly/1qPiDY5 – CashMoneyLife.com
5. http://bit.ly/1zmyxtg – CreditCards.com

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

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