Thursday, October 27, 2011

Euro zone leaders reach debt deal; Gold, Silver demand up/price up $100/oz on week

   In Brussels, European leaders alongside the IMF negotiated with the financial institutions that own Greek debt in the form of bonds. They struck a number of key agreements the main one being a reduction in the value of Greek bond debt by half (banks take on the 50% loss on the nominal value of those bonds) wiping out $100B worth of debt commitments, bringing debt to a more managable level (120% of GDP down from 160%). Some of the insurers affected such as France's Groupama (wrote 2 billion euro worth of CDS) could bear an even greater burden due to their issuance of credit default swaps (CDS contracts) which they'd have to honour if it's determined that a credit event has taken place (unlikely though given that the deal was not forced on either party). CDS contracts on Greek debt stand at $75 billion up 50% since 2009. To woo insurance companies, the EU made available to it a €30B+ credit. Also helping Greece; Government crackdown on corruption which could increase tax revenue by as much as €1.2B in 2011 (will force more businesses to collect taxes on sales).

Just because Greece was taken care of doesn't mean the European situtation has stabilized; Italian bond rates are currently at 6.5% (November 2011, was 5.867% on Oct 27) up from 4.6% in June 2011 meaning that Italy needs to raise €600 billion from private investors over the next three years just to finance its current debt level. In comparison, it was when the ten year Greek bond yield initially hit 8% that Greek debt became unmanageable. To deal with that problem the European Financial Stability Facility (EFSF) increased its available funds from €440 billion to €1.0 trillion euros (US$1.4 trillion) giving more security to Spain and Italy at least for the next couple years. Problems at the negotiating table remain an issue due to differences between Germany and France. News of the deal pushed the euro to a 7 week high against the US dollar ($1.42). Update: On November 3rd the yield on Greece's 2 year bond topped 100% for the first time.
2010 deficit to gdp ratio by country: UK: 10.4% (government debt is 80% of gdp), Spain 9.2% (Spain's unemployment rate suprassed 20% in 2010, total government debt to gdp ratio is 60%), France 7% (gov debt 81% of gdp), Italy 4.6% (gov debt 119% of gdp, austerity has included cutting back on public holidays). (CBC: TSX, loonie, soar on Europe crisis plan) The budget deficits in most of those countries is a direct result of deflation due to prices being too high/governments of the weak economies having no control over the currency (monetary policy). Also during the week, the EU approved another €130B bailout package.
Here is where Greece is coming from, Last year they had 800,000 civil servents collecting $48,000 annually in full pensions, those pensioners became eligible for that at age 52. New austerity measures are likey to impact those people significantly. European banks typically leverage about 80 times (debt used to acquire additional assets), that puts the EU in a more preciarious situation than the United States (40 times leverage). More info Buyers of Greek Bonds Choose only 1 of 4

Update - A new problem has since been acknowledged: The European Stability Fund is having a difficult time attracting investors. Canada has already said no to investment while China has "no concrete plans". The Fund recently delayed a €3B bond sale citing market conditions.

Gold is up again! Gold soared by 1.4% to $1,747.70 (after reaching a one month high of $1,728.11/oz, up half a percent before the day even began) as demand remains strong in China (high inflation, economic uncertainty, real estate bubble) and the rest of the world where many still view the EU's most recent deal as only a temporary fix that doesn't solve the root of the problem. SPDR Gold Shares added 16.645 tonnes over the last three sessions. Silver was up 5.77% or $1.80. There's also a temporary slowdown in demand from India (Diwali festival of lights festivities are ongoing; Diwali is a five day festival however the entire event including other festivities runs from the middle of October to the middle of November, most of its gold demand came in preparation for the festival) and Thailand (recovering from the worst floods in fifty years). In India, gold trades on the Multi Commodity Exchange (MCX) where the price is commonly listed per 10 grams. Indian gold demand was up 38% in the second quarter of 2011 and 29% in the last 12 months. Just to give you an idea of how unprecedented the price of gold is today; Over history, the last bull market high was $850/oz.

If, as many suggest, the People's Republic of China lets the RMB increase in value relative to the USD, that will weaken demand for gold in the short term as investors see the new exchange rate as a sign of economic stability but in the long run, the stronger RMB will increase Chinese demand for Gold due to its greater purchasing power. Also, a stronger RMB will raise Chinese import demand, indirectly increasing Gold demand from abroad too.
Platinum group metals increase Platinum was up 2.77% ($44.2/oz) by the end of the trading day Thursday to $1,641.4/oz. Platinum, used in everything from surgical equipment to white gold plating to catalytic converters, is produced at a rate of only 5-6M ounces a year (5-10% as much as gold). South Africa produces 80% of the world's platinum. Spot palladium up 2.78% to $665/oz reaching another one month high (also recorded one month high the day before). Palladium began the year around $799.5/oz but since then has dropped 20%, platinum began the year at around $1770/oz but has dropped 7.8% since.

Other Notes: In the July-September 2011 period the US economy grew 2.5% up from the 2.3% estimate.
Total EU-Canada (ex UK) trade is $50 billion (6% of total Canadian trade). News of the Greek debt deal boosted the exchange rates of a number of currencies against the American dollar however not versus the Chinese Yuan or Japan's Yen (Euro up 2% to US$1.42, Canadian dollar up 1.5 cents to above parity at US$101.02). Many non US currencies actually strengthened versus the euro and dollar (US & Cdn).
Sony buys out its partnership with Ericsson for $1.5B giving Sony complete control over its smartphone business, allowing it integrate more of its products and software. Ericsson will now be able to focus more on its wireless technologies. Total world debt represents about 5X total GNP.

Wednesday, October 19, 2011

Sobeys challenging Loblaw Companies' dominance in Canada's grocery market (superstore competition, provigo, no frills, loblaws)

   Between the years of 2008 and 2011, annual sales at Empire-Sobeys Ltd rose 12% to over $16B (53 weeks ended 2Q12 up from $15.5B the year prior, in the 1st qtr $4.15B up 3.2% while operating income for the qtr was stable at $150M) compared to only 4.9% for Loblaw Companies (in the 3q11 sales were 2% higher qoq, 2q11 qtr Loblaw sales didn't grow at all qoq steady at $7.27B (rev up 6% though quarter to quarter)/ income up 16m, ebit up 3m) and 0.8% for Metro Inc (fiscal 2011 $11.431B). Since 2006 the first full year that A&P Canada was part of Metro, Metro's sales have increased by only 4.3% compared to 24.7% for Sobey's; Minor boost for Sobeys came in 2007 when it acquired BC chain Thrifty Foods for $260M, for the past six years Sobeys has led the industry in same-store sales growth. Sobeys latest quarterly dividend was 22.5 cents per share. When we look at the last fiscal year annual revenue at Loblaw Cos was up only 0.3% compared to 3% for Sobeys (Sobeys 12 month period ended in May 2011, Loblaws January 2011). Most of the increase in Sobeys revenue came from 1) Larger new stores (in terms of square footage, closing the gap between it and Superstore 2) Modest inflation 3) Product/services innovation. Investments/other operations provided roughly 1.2% of revenue ($51.1M). Food retailing sales up 3.3% in the quarter (surpassing $4B to $4.106B). Consolidated funded debt fell 12.8% to $1.1004 billion. In the discount market Loblaw's No Frills leads all other grocers, just the 152 No Frills stores in Ontario made $3.4B in sales in 2010 more than Sobey's FreshCo and Metro's Food Basics combined. (June edition: Grocery Trade Review)

Food retailing market share in Canada among grocers: Loblaw Companies 43%, Sobeys 21%, Metro Inc 16%. (Atlantic Farm Focus: Sobeys to supply Target)

Sobeys same store sales growth was 1.7% in the 1st quarter of the company's 2012 fiscal year (ended August), that compares to Loblaw Companies reported 1.3% in its 3rd qtr (ended October) and -0.1% in its 2nd; Sobeys led the industry in same store sales for six consecutive years (the latest a 1.3% increase in 2011).  In the 2nd qtr Sobeys same store sales +1.9% vs +2.5% for Loblaws.  Loblaws earnings in the quarter ended October 2011 totalled $236M up 19.8% even though revenue increased only 2.0% to $9.7B, only the second quarter to quarter increase since a 3.5% decrease back in March (4Q sales grew strongly at over 3%). Loblaws revenue has been inconsistent quarter to quarter due to flat food sales and lower sales in drugstore, apparel and general merchandise. Parent Empire Company Limited has actually been controlled by the Sobeys clan since 1947 when Frank Sobey bought it for its land and ability to be transformed into an investment company. 1947 was also the year Sobeys opened its first supermarket store in Pictou. It was on the eve of Sobeys' 100th anniversary celebration of JW's birthday (JW was originally a marketer of meats) that Sobeys purchased Empire Company outright, acquiring the 27.9% of shares it didn't already own for $1.06B on April 26, 2007 for $58/share ($2-4 premium over the fair market value). In the fourth quarter of fiscal 2011 sobeys attributed the drop of 13.8% in sales from other operations to lower box office attendance due to movies having less consumer appeal. In the discount food market FreschCo is a new invention by Sobeys aimed squarely at Loblaws' No Frills ($3.4B in revenue or about 11% of Loblaw Companies annual sales). No Frills has been in business since 1978. Only about 12% of the grocer market in the maritimes is in the discount market, that's in stark contrast to Ontario (45%) and Quebec (33%). No Frills sold $3.4B worth of goods in Ontario alone in 2010 more than its two main competitors combined. (June edition: Grocery Trade Review)

In 2011 Sobeys expanded 12 stores (down from 13 in 2010/11 in 2009), opened 44 (up from 41 in 2010/47 in 2009) and closed 39 locations (down from 52 in 2010). Sobeys went private in 2007 when it became a subsidiary of Empire Company Limited following Empire's purchase of $1.06b worth of Sobeys outstanding common shares bringing its interest up to 100%. The company's 2011 revenue is 61% higher than it was in 2002 (145% increase in book value per share: 47.76).

Brand Diversification and the Ethnic Market
Sobeys has also been more open to diversification of its brands; After Metro acquired A&P it spent $200M to completely convert Loeb/A&P locations into Metro stores, however Sobeys chose a different route; After acquiring Price Choppers in the 1990's it left the brand largely intact for more than a decade before rebranding it as FreshCo, the other acquisition IGA/Oshawa Group ($1.5B deal in 1998 tripled its size and made it into a national company) was left intact. Initially, Sobeys did this in a bid to win over customers through customer appreciation efforts however brand diversification appears to have benefited Sobeys in the long run because it has allowed it to tap into different markets more effectively (Loblaws gained a bigger market share after it acquired T&T and launched No Frills and now Sobeys is doing the same with FreshCo, that chain has proven popular among ethnic customers, a consumer base that already represents over 35% of shoppers in Ontario and will represent 31% of all Canadians by 2031. (Sobeys takes on Loblaws/Weston to court discount and ethnic shoppers)
Sobeys has experienced tremendous growth over the last decade even before its recent success, between 2001 and 2006 Sobeys stock price rose by over 68%. Sobeys also has a significant stake in Canadian real estate (45.9% of Crombie real estate investment trust, 40% of Genstar Development Partnership) and with Canadian real estate prices climbing (average home price up 6.5% in September/# of properties sold up 2.7% qoq) those investments are bound to pay off for Sobeys. Crombie reit's properties include both high end assets (Barrington Place Shops, Cogswell Tower, CIBC Skyscraper in Halifax) and more traditional retail assets (Greenfield Park IGA plaza, Quebec). Sobeys also holds 100% ownership of Canada's second largest chain of movie theaters, Empire Theatres (Sobeys has operated cinemas since 1984). 2011 is also the year Sobeys converted most of its mainline locations into 24 hour supermarkets taking away from Superstore a key competitive advantage. About 85% of Empire's assets are associated with the food retailing business. Sobeys first reached $1 billion in sales in 1987, in 1999 (2000 fiscal year) Empire-Sobeys sales surpassed $10 billion for the first time (reflecting the first full year the Oshawa Group was part of it). Although revenue increased 75% that year, net income fell 35.7% to $86.7m.

Agreement With Target Canada Gives Sobeys Deeper Market Access
    On September 23, 2011 Target Canada announced that an agreement had been reached with Sobeys in which Sobeys will become the primary supplier of grocery items. The deal is big for Sobeys because it will be able to sell its own private label items outside of its own locations of Sobeys, FreschCo, IGA, etc. A similar agreement made in the US between Target and SuperValu Inc significantly boosted SuperValu's revenue and market access (operates over 2,500 locations but that number nearly doubles when Target and other stores it serves as primary distributor are included). 125-135 Target locations are slated to open begining in 2013. Since the news broke about a month ago Sobey's stock is up 6.2%. In the discount supermarket sector Sobeys' FreschCo competes directly with Loblaw's No Frills throughout much of Canada (though FreshCo hasn't yet been introduced to key areas such as Halifax), while Superstore (Real Canadian or Atlantic depending on the region, the superstore brand represents 1/5th of Loblaw's corporate run locations), Provigo (taken over in 1998/1999, presently Provigo is the largest brand by locations, 2X as many as Superstore), Maxi. Great Food and Zehr's take on Sobeys, IGA and Foodland head to head in regular priced food retailing in central and eastern Canada. About 30% (<400) of all Loblaw locations are discount 'no-frills' (removal of non-essential items to keep prices low) grocery stores (no-frills/valuemart/freshmart/wholesale club), that compares to less than 20% (252) for Sobeys' thrifty foods/freshco. No Frills sold $3.4B worth of goods in Ontario alone in 2010. (June edition: Grocery Trade Review)

On November 15, 2011 announced that it had reached a deal with the National Bank of Canada involving the sale of 15,000 tonnes worth of CO2 greenhouse gas emission gas credits (annually) to the bank, allowing the bank to be a neutral emitter (Sobeys currently has an excess of credits in Quebec due to improvements at IGA locations where harmful refrigeration gasses have been replaced).
Stats from the last two reported quarters
Empire-Sobeys - Fiscal 1q12 & 4q11: revenue was $8.3415 billion up 6.1% from the 1q11 & 4q10 ($7.8585), ebitda $512.8m up 6.3% from $485.8m, profit $171.7m up 7.5% from $159.8m.
Loblaw Companies - Fiscal 2q11 & 3q11: revenue was $16.841b up 1.2% from 2q10 & 3q10 ($16.646), ebitda $1143m up 7% from $1068m, profit $433m up 14.6% from $378m.
Metro Inc. - Fiscal 3q11 & 4q11: revenue was $6.233b up 1.8% ($11.4306b up 0.8% for the fiscal year)
ebitda $420.7 million down 2.9% ($773.4m up 6.8% for the year) with net earnings of $211m down 1.1% ($386.3m up 3.4% for the year).

For Empire-Sobeys, food retailing made up 98% of sales and 90% of operating income in both 2011 & 2010. The commercial real estate business contributes about 30% of funds from real estate operations even though it only contributes less than 15% of real estate revenue. Food Retailing: net debt/net total capital ratio was at its lowest level in 2011, hitting 13.4% it was as high as 32% just three years ago (2008). There are about 286 standalone Sobeys locations across Canada (25% of the company's locations). In fiscal 2011 57 freschco stores were opened, which exceeds units opened by main competitor No Frills. In 2005 it acquired the Oshawa Group, owner of IGA Canada. In March 2002 Sobeys sold Serca Foodservice to SYSCO for $411M.

Sobeys sells Wajax Income Fund but Maintains Interest in Halifax property owner Crombie Reit
->Since March 2006 Sobeys sold 105 properties to Crombie REIT raising $897m in 2 transactions.
->In 2010 Sobeys lowered its debt to capital ratio from 32.7% down to 29.3% and consequently (in May) both Standard & Poor's and DBRS raised Sobeys credit rating.
->In 2011 Sobeys divested itself of Wajax stock by selling 27.5% of Wajax Income Fund for $121.3m (used the proceeds to pay down debt). The market value of all of its real estate investment holdings was $451.2m on May 7, 2011 compared to $487.7m a year earlier (decrease was entirely due to the divestment of its Wajax investment which was worth $117.9m in 2010).
->During fiscal 2010 food retailing/real estate represented 94% of net income. At the end of 2010 total locations (food retailing) under the various banners numbered 1,334 (28.1m square feet) in 836 communities. In 2011 free cash flow fell to $132.6m from 350.1M.

Friday, October 14, 2011

Growth in Oil Supply is Lagging Demand, Refineries open in China in response to demand growth (Tianjin), Russia aims to diversify away from oil after World Bank Issues warning

   There are varying viewpoints regarding the state of supply and demand over the next 10-15 years. On one side are those who think massive shortages are inevitable, many of whom subscribe to the peak oil theory. In 2010 the US military warned of massive shortages in supply as early as 2015 with the annual shortfall reaching 10M bbls/d. Another research report released in 2009 by Merryl Lynch stated that by 2015 the world will need to replace an amount of oil output equivalent to Saudi Arabia's production, every two years (decline in oil production leading up to 2015 could be as much as 30M barrels/d).
On the other side are those who see shrinking demand and lower prices (In September 2011 the world bank warned Russia that its economic growth was too dependent on oil demand/oil prices; Russia has to be concerned by the sub $90 oil price and the 2011 forecast made in September by the US Energy Agency which cut its 2011 global demand growth outlook (demand still increases but not by as much). Update (Nov. 24): Opec price forecast changed to $85-95/bbl up from $75-85/bbl previously (notable since $100 is the price at which the majority of producers hedge).  Goldman Sachs expects oil to reach $140/bbl by the end of 2012.  The volatile situation in the arab world (Iran) and Middle East region (Syria, Tunisia, Egypt) has the west concerned that supply from major exporters could come to a hault, consequently putting a lot of positive pressure on oil/gas prices. Unlike Europe, the US doesn't import oil from Syria so inconsistant output there has less of an impact on the US.  Europe's oil embargo on Iran will have consequences for both Europe and Iran: 1st quarter of 2011 Iran was the source of 4.39% of oil imports ranking eighth overall after Russia, Norway, Libya, Saudi Arabia, Kazakhstan, Nigeria and Azerbaijan.  Iran imports 45% of its food, 60% of gdp comes from oil.

For the past 10 years, total supply each year has roughly equaled total demand (1995: 70.1 demanded/70.7 mbpd supplied, 2009: 84.7 demanded/85.0 supplied) but that could change as early as 2012. Also of note, even though retail prices for gas are much higher in Europe and Japan than the United States, industry margins aren't; In Japan, France and Germany consumers actually pay more in tax than they do for the crude itself (June 2008: taxes accounted for the following proportion of pump prices Canada 24%, USA 9.6%, Japan 34.7%, Spain 45.4%, UK 57%, Germany 59%. (International Energy Agency) (In Canada, an increase of C$1 in the price of a barrel of crude oil raises pump prices by about 0.63 cents/liter with only 0.03 cents of that due to the GST tax. (March 2010: National Energy Board of Canada-Gasoline Pricing-Energy Facts) Though oil may seem cheap today ($84.51/bbl after hitting $110 in April 2011) $80 still higher than its 2010 average of $79.45 ($61.92 in 2009). November 16, 2011: crude oil suprasses $100/bbl, the last time it passed that barrier was February 2011 and it stayed there for months before tumbling back down (before that it hadn't reached the level since October 2008); the reason being given for its current swing back up is tensions with Iran, the world's 4th largest producer. In 2011 the highest oil futures reached was $120/bbl which happened at the beginning of the year in January. Biofuels production isn't expected to grow significantly until the 3Q of 2012 when it is forecast to rise to 2.4M bbls/d (up 20% quarter to quarter). Though North America accounts for less than 15% of the world's oil supply, 2,109 of the world's 4,044 active oil rigs are stationed there.

Update January 25, 2011 The International Energy Agency made a couple of surprising announcements. It says oil prices will rise to $146/barrel by 2035 as China, India and the Middle East consume more energy. It also forecasts that U.S. production will increase 22% between now and 2020 to 6.7M bpd from 5.5M bpd (crude only, natural gas not included), allowing the country to rely less on imports. The U.S. will become a net exporter of natural gas by 2021. The bad news for the U.S.? Shale natural gas recoverable reserves in Marcellus, a vast area covering land from New York and Tennessee, was revised down from 410 million cubic feet to 141 million cubic feet. US production of natural gas is presently around 2.3M boe per day.

In January of 2009 the 12 member oil pact known as opec began implementing a plan that calls for 4.2M b/d in cuts to crude output even though key member Saudi Arabia wasn't in full agreement (defied opec and raised production to 9.8M bpd in July 2011; 1.1M bpd increase since the outbreak of war in Libya) ; as well, Algeria is over its opec production quota and is pressing for increases but Algeria probably isn't too concerned given that a lot of its output is in natural gas liquids, a petro component that's already exempt from quotas. OPEC's crude oil production fell to 30.15M bbls/d in September 2011. (Platts Survey: OPEC Crude Output Drops to 30M bpd); Annual crude output (opec) averaged 31.6m bpd as recently as 2008 (total supply including ngl's was 36.2m vs about 35m in 2010, rise of 0.8M in ngl's made up for some of the drop in crude). Crude production isn't the same as oil supply (oil supply also takes into account non-oil additives like ethane/ethanol, pentane, propane, butane as well as field condensates). According to the most recent data 2011 oil demand should increase by about 1.6% and average 88.2 million bpd over the year (in September it was at 88.7 mbpd). Production from Iraq could more than double by 2016 (4.1 mbpd compared to 1.5 mbpd in 2010).

In OPEC's 2010 annual report, Venezuela's proven oil reserves were given as 296.5 billion barrels (40.4% larger than in 2009, or roughly the same as Iraq and Iran combined) surpassing Saudi Arabia (264.5B barrels) however outside opec many dispute the estimates citing concerns regarding the economic viability of Venezuela's oil since a lot of has to be extracted by unconventional means (Venezuela's output is only about a quarter of Saudi Arabia's). The recent war in Libya has put a hault to oil production there but production is slowly coming back online with 1M bbls/d likely within six months and full recovery in 15 months (in 2009 Libya produced 2% of the world's crude and 0.5% of its natural gas). (OPEC oil output will fall as Libya recovers -SecGen) Saudi Arabia produced 9.606M bpd in June and 9.76M bbls/d in August (down from 10.5M in 2010) while Kuwait was at 2.6 mbpd in July (up from 2.45 mbpd in 2010). About $16-20 of oil prices (ranged from 80-95/bbl last couple months) is attributable to risk uncertainty in certain countries (Libya, Nigeria, Iran). The world is becoming less reliant on OPEC for oil (opec production down to around 30M bbls/d in 2011 from 33.3M bbls/d in 2009) however if as the US Energy Agency expects, non opec countries fail to meet consumption increases 5-10 years from now, production from opec could rise as more pressure is put on it to meet the extra demand. OPEC exports of natural gas were up 27.6% in 2010 (21% share globally) with some of the biggest increases coming from Qatar (gas production up over 70% since 2006 (109.335 vs 64.2 bil m3). Qatar was also the main source of Exxon Mobil's 10% increase in 2011 first half oil equivalent production. Graph: 2011 and 2012 uses data updated (Sept/Oct '11) from the US Energy Agency not IEA whose data is shown in the third table).

Graph shows production only for selected companies, other major companies such as Reliance Industries, Lukoil, Sinopec are not included).
In June 2011 Paris based IEA (agency) pegged 2016 consumption at 95.3 million bbls/d with 41% of the increase after 2010 (3 out of 7.3 million bpd) tied to China. That puts annual growth in demand between 2011 and 2016 @ 1.3% or 1.2M bbls/d (up from 0.5 mbpd previously forecasted by the agency). Oil production capacity will rise to over 100 mbpd from 93.8 mbpd in 2010. With demand that high, opec's plan to lower crude output to under 30M barrels seems unrealistic (opec thinks that lowering supply is the only way to keep oil prices at prices above $80-85/bbl, a price it's comfortable with). A lot of the world's new production will also come from Iraq (4.1m bbls/d up from 1.5 in 2010). Canadian supply will rise to 4.7 mbpd by 2016 while US supply grows to 8.3 million bbls/d with US onshore shale formations driving the growth (shale from North Dakota and Texas could eventually produce at a rate of 2.5 mbpd). (McClatchy Newspapers, August 5, 2011) Angola and the UAE's are the main sources of OPEC crude production growth (2012-2016) while transportation will be the source of 80% of the growth in demand in 2016. Supply growth in non-opec countries is being led by Brazil (in 2011 non-opec production was up 760,000 bpd). In September JP Morgan estimated that oil supply will rise to 91.2 mbpd by 2013, a bullish position to take considering opec doesn't plan on contributing anything to growth in crude output (2009 is the year its plan to lower crude output to 29.4 mbpd took effect). Biofuels aren't expected to grow significantly until the 3Q of 2012 when they are forecast to rise to 2.4M bbls/d (up 20% quarter to quarter).

2010 was a big year for opec ngl (gas liquids) production; Averaged over the entire year, output surpassed 5m bbls/d for the time ever (avg given as 5.5m by the IEA) up from 4.7m the year before, though during the year rates changed a lot (5.2m bbls/d early in the year down to 5.08m by May before rising later on). A lot of that increase came from Saudi Arabia (1.7M bpd, up 8%) where a number of projects started in 2009, finally came online. (Kingdom's growth expected to reach 6.5% this year) Algeria produces about 800,000 bpd of NGL's out of 2.125M bbls/d, the highest proportion of NGL output by any of opec's members. Algeria is also a top 6 producer of natural gas. World refinery capacity: 88.6773 million barrels per calendar day (b/cd) 9.9% of which came from opec (9.5% in 2006). What's striking is that the key sources of new production Venezuela (down 5.5% since 2006) and Canada (down 6.8% since 2006) aren't focused on refining their own oil (in Canada for example, oil is being redirected to other places such as the U.S. through new pipelines the largest of which will be the $7B Keystone Pipeline ($13B system) if approved (opposition from environmental groups despite approval from Greenpeace Founder, American refining capacity up to 17.869Mbblpd in 2010). Between 2011 and 2015 Keystone could create as many as 250,000 jobs associated with construction of the pipeline (20,000 long term in the US/$20B to US economy). (US Chamber of Commerce) China's refining capacity is 38% as much as the USA's even though it produces 50% as much oil. Saudi Arabia, the world's number two source of oil is also a big consumer, consuming 2.81 million barrels per day in 2011 75% higher than in 2001, in the 1990's its consumption grew by only 39%. In just 2010/2011 demand by Saudi's rose 5.4% per capita, 4X greater than the global average. Part of the reason it consumes so much has to do with its use of crude oil in generating electricity, rather than using refined oil it burns the oil directly making use of it inefficiently (2009 demand from there was 450,000 bpd or twice what it was just seven year earlier while in Riyadh demand is expected to exceed 580,000 bpd in 2011).

By Country

China - Oil output from China has risen steadily over the past decade (from 3.0M in 1995 up to 3.9M in 2009 and past 4M bbls/d in 2010; 7% growth in 2009) however Chinese oil demand has skyrocketed (3.3M bbls/d in 1995 (only 10% higher than domestic prod) to 4.1M in 1998, 5M in 2002, pushing past 8M by 2009). It took from 1998 to 2002 for China demand to rise by 1M bbls/d but only 1.5 yrs for the next 1M increase. Total demand by China is still less than American demand (18.7M bbls/d vs 8.4M bbls/d). Higher demand could force China to increase refining in the country by 14% (the Tianjin refinery in China is one of many being built; Tinjin is a $4.5B joint venture between Russia's Rosneft (China is a top 4 destination for Russian oil) and CNPC of China. Rosneft owns 49% of the 200,000 bpd refinery that will be 70% fed by oil from East Siberia. Between 2006 and 2010 Chinese imports of natural gas exploded by 1500% (1000 to 15,980M cubic meters).

Saudi Arabia - Production dropped significantly between 2008 (9-10M) and 2011 (8.9M in February-April but increased to 9.8M bbls/d by July; domestic demand : 2.4M bbls/d). (International Energy Agency - Oil Market Report 12 May 2011), (International Energy Agency - 2010 Edition) Crude oil exports by Saudi Arabia suffered in the late 1980's before recovering in the early 1990's (tripled in just a couple years). ( Between 2000 and 2010 consumption in Saudi Arabia has risen more than 75% (up to 3.1% of global demand) an increase that exceeds even changes in India's demand. Production averaged 8.8M bbls/d in the first half of 2011 (peaked at 9.1M in May) up from 8.3M bbls/d in the first half of 2010. Saudi Arabia ranks sixth in the world in terms of oil demand. The higher rates of production in the summer of 2011 were a direct response to Saudi Arabia's promise to replace Libyan production (Saudi Arabia increased its output by 1.1 mil bpd since the outbreak of war in Libya).

Alberta, Canada - According to Alberta's 2012 budgetary report, total oil production will reach 3M bpd by 2014, 2.4M of that is from non-conventional sources like bitumen (bitumen royalties totalled $5.7B in 2011 will be $9.9B in 2014).  2011-2012: non-conventional oil production was at 1.78 million barrels per day.  Conventional oil production will be 500,000 bpd in 2013.  Provincial royalty revenue:  Bitumen contributed $5.7B of the $6.5B total which includes conventinal, in 2012, 30% higher than the $4.4B earned the year before.  Total will be around $12.2B in 2014.

Russia - The world's largest supplier of oil. Russia's economy is heavily invested in oil (state oil company Rosneft produced more than 2M bbls/d while Gazprom is one of the world Oil Majors). On september 20, 2011 it was reported by the Voice of Russia that $20/bbl difference in the price of oil could mean the difference between GDP growth of 2% and a recession (predicated on oil prices decreasing to $60/bbl for an extended period of time). Consequently, a fall in oil demand would cause a 1.5% drop in gdp growth. Though unlike most developed countries, Russian household debt is low and so a recovery (from recession) would be relatively quick. (World Bank warns of possible global oil demand fall:Voice of Russia) In 2009 Russia surpassed Saudi Arabia in terms of production. Russia is also the world's second leading producer of natural gas, providing 19.3% of global supplies (gas reserves are the largest- proved reserves at 1680T ft3/26.7% of global reserves). In 2010 Russia's gas production rose 4.5% while domestic consumption fell 3.3% pushing net exports up 29% (6,539BCF ranking 86 among all countries). (U.S. Energy Information Administration: Russia Briefing) China was the 4th largest importer of Russian oil in 2009 (Germany was 1st), but China could be top 3 by 2011/2012 with exports to China rising from Russia increasing 20-30% annually (70% of crude used in China's newest refinery in Tiajin will come from East Siberia). Russian oil exports to the US were 21.% higher in 2009 (rank 9th, Canada is the main source of imported oil).

USA - In 2008 the United States depended on oil imports to supply 67% of what its refineries used but by 2010 that number dropped to 49%, the decline has more to do with a rise in exports of petroleum products (in 2010 the US became a net exporter of petro products for the first time since 1973). The last time the United States experienced such a drastic drop in foreign dependence to meet its oil needs was between 1977 and 1982 when foreign oil met only 28% of demand (production from Alaska also played a key role). Between 2006 and 2010 imported petro production fell by about 25% or 1 million bpd.

Libya - Crude: Production (at 100%) 2% of global supply, reserves: 3.3% of world total.
Natural Gas: production: 0.5% of global supply, reserves: 0.8% of world's total. ( Libya: MIneral Industry Overview)
references: output for 2011 and beyond reflects revised data released by the US Energy Agency (not accounted for in IEA's September report shown in the table.

For more information about petroleum specifically the oil sands coming out of Canada visit Alberta Oil - North American Interests

Information from Saudi Arabia
International Energy Agency data from 1995 to 2009
2016 forecasts full report

Sunday, October 9, 2011

Palladium Is Widely Used, Similar to Platinum and A Lot Cheaper than Gold & Platinum Group Metals (Rhodium) so Bullion Investment Should Increase; 2011 Production Down 5.4% but Automotive Demand Up 6.7% (Norilsk, Anglo Platinum, North American Palladium)

        Palladium is a widely used durable and versatile metal. Though useful in plating jewelry, clothes fasteners and engine systems (aircraft and automotive) most of the demand comes from industries that require catalysts (mainly catalytic converters, useful due to its light weight, high boiling point, is an oxidizing agent) and versatile metals used in plating conductive materials; In electronics, palladium is preferred over nickel and platinum (plating the electrodes of capacitors is either alone or palladium in conjunction with silver); For plating electrodes, the only alternative to palladium is nickel but nickel has its limitations, it can only be used in less demanding applications. In automobile circuits, palladium holds silver plated conductive tracks in place. (Platinum today: Electric Components) Some types of jewelry prefer palladium to gold/platinum for reasons which include color (44% whiter than platinum), weight (38% lighter than gold), hardness (harder than gold meaning that even at high purity it's highly resistant to scratches), and price (cheaper than gold and platinum). Even with those advantages the jewelry industry uses most of it only as a hardening and whitening agent that's alloyd with gold (white gold can't be made without platinum group metals like palladium which is notable considering that white gold is gaining popularity particularly among brides preferring white gold wedding rings). The process of transforming yellow gold to white gold is made easier when gold-palladium alloys are used because gold and palladium are soluble in one another. Palladium is also used to purify hydrogen gas because when heated, the metal allows hydrogen to diffuse through it, a process that's made easier by the metals' high melting point.
       Other info: The Spanish were among the first to discover it when they mined for silver in Colombia. Palladium was first isolated by WH Wollaston in 1803, at the same time he discovered Rhodium. In late 2010 George Soros affiliated fund, Soros Fund Management raised its stake in Platinum Group Metals Ltd (one of Canada's largest platinum group metals exploration companies) to 9.73% from under 1%. Platinum Group's primary asset is the Western Bushveld Complex in South Africa (74% interest/20 year mine life @ 275,000 ounces/yr but the mine will cost over $400m & take two years to construct); Platinum Group Metal's shareholders include JP Morgan and TD Asset Management. The ETF Physical Palladium Shares (PALL) holds over $500M worth of palladium (in terms of bullion weight, the etf's holdings are presently 6X more than they were just 4 years ago).

Investment Options: ETF'S - Top pureplay options are NYSE:PALL Palladium Silver Shares ETFS and NYSE:LPAL VelocityShares 2x Long Palladium ETN.  PALL holds around 700,000 ounces of the white metal but has exceeded one million ounces as recently as 2011 (holdings increased with the dramatic rise in palladium prices).  VelocityShares ETN is relatively new; ETN's are debt instruments so they are not considered great options for long term buy and hold investors (why VelocityShares holdings of palladium are wildly inconsistent).  VelocityShares began trading mid October 2011.  Diversified ETF options Zurich Cantonal Bank, or ZKB ETF has holdings of palladium (387,257 ounces) and platiunum (366,957 ounces).

The number 1 source of demand is vehicle manufacturers who make use of its capabilities as a catalyst in catalytic converters. The catalyst is required to stimulate an oxidation reaction that ultimately converts toxic combustion byproducts to carbon dioxide and water (reduction of NO to O and N is by rhodium).
Palladium accounts for 90-95 % of precious metals used in catalytic converters (95% for gasoline/20% in diesel powered vehicles) and even more noteworthy, palladium's share of diesel catalysts rose from 7% in 2007 to 20% in 2009. Each catalytic converter uses 4 grams of palladium and platinum. Palladium shares many characteristics with platinum, not surprising given that palladium is one of only six transition metallic elements comprising the Platinum Group of the periodic table (the other four being rhodium, ruthenium, osmium and iridium). Among their similarities: all are great catalysts, are hard metals making them resistant to scratches. They also have high boiling points and are noted for their electrical properties. As for platinum, its share of diesel catalysts fell to 80% compared to 86% in 2008 owing to the increased popularity of palladium. Between June 2010 and June 2011 3.1m oz of platinum was used by automakers (compare that to 5.4M ounces for palladium) however jewelry demand for platinum waned (15% less, bringing it down to 2.4M ounces; palladium jewelry demand fell 20% to 0.6M ounces), that's in contrast to late 2008/2009 when lower prices boosted demand by jewelry 70% with growth recorded in China. (Northram Platinum Ltd July 2011 Annual Report. Angloplatinum 2009 Report) With regards to rhodium, South Africa produces 60% of the extremely reflective/corrosion resistant platinum group metal ranking just ahead of Russia. In 2009 the spot price of rhodium dropped like a rock; it averaged only $1,509/oz that year after averaging $5,174/oz the year before. In 2009 gold was the only metal with an iso currency code to avoid a price decline (averaged price). One of rhodiums key uses is in the production of nitric acid (nitric acid is one of the compounds usedby jewelers to verify whether or not something is real gold). Supplementary info Trends in the gold to silver & gold to platinum ratios Palladium demand by end-market : auto catalysts (54%), electronics (14%), investment (9%), dental (9%) & jewelry (8%). (Stillwater Mining 2010 annual report)
In 2010, 80% of the world's palladium came from Russia (2.7-2.9 million ounces, steady from 2008 to 2009 but down 16% from 2006) and South Africa (2.485M oz same as the previous year but down 11.3% from 2007). South Africa is home to some of the biggest platinum-palladium mines in the world namely those in the region of the Bushveld Igneous Complex (South Africa just behind Russia at 40% for palladium production but leads all countries in platinum supplying 80% of that metal (4.725M ounces). The 2011 global supply of palladium is forecast to decline 5.4% yoy to 6.8M oz from 7.1M oz in 2010 & 7.6M oz in 2009. 6.3M oz of the supply was mined. Palladium supply from the top 3 sources (Russia, South Africa, North America) is down 18% in just the last four years (2006: 6980M oz vs 2010: 5545M oz). There are a number of problems regarding supply, firstly mine depletions particularly in Russia where Norilsk has become the only major producer, also Russian stockpiles are dwindling which is significant given that traditionally it has been the largest source of non mined production (total non-mined prod: approximately 1.3 million ounces annually). Also of concern: deeper mine shafts in South Africa (mines are being made deeper because that's where the high grades are) and so there are safety concerns, the country is also struggling with foreign exchange rates and their affects on currency losses. (Stillwater Mining Company: March 2011 Presentation) Palladium primary production has fallen even faster than it has for platinum (-15% vs -12% since 2006). Stockpiles in Russia, the source of 17% of Pd supplies since 1984 are almost entirely exhausted.

In catalytic converters, palladium now accounts for over 95% of the catalysts used, up from 85% in 2007 (Stillwater Mining, March 2011) meaning that the automotive industry (a growing industry sector with 40-50 million people entering the middle class each year in China, Brazil and other rapidly developing countries) is becoming ever more reliant on palladium (6% increase in palladium use by automakers in 2011, 5.5M ounces, each catalytic converter uses 4 grams of palladium + platinum). In 2010 72 million light vehicles were produced and that number is expected to grow to 88 million by 2013 reaching 100 million by 2016. Strict pollution controls mandate the use of catalytic converters. (North American Palladium, October 2011)
September 2011: HSBC, the world's #2 bank outside China, raised its 2012 price forecast for palladium by 8% to $810/oz citing the fact that demand will outstrip supply (in stark contrast to the previous two years). Long term price forecast raised by 21% to $850/oz. However other top banks are forecasting even higher palladium prices in 2012; JP Morgan and Credit Suisse have the spot price pegged at $938/oz and $950/oz respectively (the lowest forecasts were made by UBS ($825) and BNP Paribas ($810) *of note RBC lowered its outlook from $1000/oz to $860/oz. Between October 2008 and September 4, 2011 spot palladium increased by over 290% compared to 133% for platinum, 200% for gold and 0% for rhodium. Despite similar production (over 6M ounces), demand for palladium by end market users exceeded platinum demand by 24.0% (7.0 vs 5.72 million ounces). (Stillwater, March 2011) 91% of the world's 6.8M ounces of annual palladium supply comes from South Africa (42%), Russia (40%), and North America (9%) (includes about 1.3M ounces of secondary supply). (North American Palladium, October 2011) Here is more info on gold/silver investing

 More Reason To Like Palladium: Shipments to Switzerland (1 of only 2 main hubs in Europe for storage of the metal) from Russia (world's largest primary producer of palladium) are down to 500,000 ounces in 2010 (average 1.3M ounces for the last 20 years); The main reason for the decline is that Russia used to have four big producers but today they only have one, the rest have nearly exausted their reserves (the largest of them, OAO GMK Norilsk Nickel could also be deplete of palladium by 2015-2020). For 2011 output is forecast to fall by 5.4% to 6.8M ounces even though demand from carmakers alone will increase 6.7% to 5.5M ounces. Russian stockpiles form the fourth biggest source of palladium supply. The price of palladium peaked in 2001 at $1,090/oz when concerns regarding supply caused many to hoard the white metal. There are also ETF's that hoard palladium; they first began trading in 2007 and have since grown their assets to over 2M ounces (currently they trade in Europe (Zurich, London), the United States (NYC) and Japan). Total annual supply of palladium was as high as 8.58 million ounces in 2007 but has since fallen to around 7 million (6.8M in 2010/7.1m oz in 2009) a 17.2% decline even though total gross demand only fell by 7.4%; During that time Russian supplies fell 19.93% and that's directly responsible for 61.15% of the global drop in supply (1.48m ounces). (Aquarious Platinum) 2009 combined production of platinum group metals was only 16% as much as gold (Au: 2572 tonnes about the same as in 2005); Three of the top five sources of gold, the USA, South Africa, Australia combined, produced 21.1% less of the yellow metal in 2009 than in 2005.

If you wanted to invest in a company here are a few to keep in mind:

Stillwater Mining produces 63% of the palladium coming out of North America (or 5.7% of the global supply) which is notable since North America is the world's #1 source of palladium demand (29% in 2010 ahead of China at 20%). Stillwater's reserves are at 19.9M ounces (palladium and platinum). In 2010 metals recycling contributed 6.8% of total revenue ($11.5m/$168.5m) down from 7.9% in 2009 ($6.5m/$81.8m). Average price realization per ounce of metal produced: $1,046 up 34.3% from the year before ($779/oz). Since 2002 it has had business relations with Norilsk, that has opened the door to more investment from abroad (though sales of palladium received from Norilsk ended in 2006). 2011 capex at $120 million up 139% in just the last year. Stillwater is a primary producer of platinum and palladium meaning that anything else that it mines (rhodium, gold, nickel, silver and copper) is produced as a byproduct. About 3/4 of Stillwater's output of platinum group metals comes from the Stillwater Mine (the other 133,000 oz is produced at East Boulder). North America contributes 9% of total supplies of Pd but 11% of primary production. Last year Stillwater Mining paid $118 million for the Marathon mine in northern Ontario (2.4M ounces of palladium 2P reserves/total resource 5.4M ounces).

(gold:platinum ratio 2007-May 2011)
North American Palladium (tsx:PDL, amex:PAL) (41% fall in stock price over last 12 months means it has a high beta value) - The company is the only primary producer of palladium in Canada. Flagship mine is Lac des Iles abbreviated LDI, located in Thunday Bay, Ontario; LDI is currently undergoing a $250 million shaft expansion (October 2011) intended to eventually raise production at the mine to 250,000 ounces by 2015 (when cash costs are forecast to be lower at $200/oz). LDI: The second quarter of 2011 produced 28.9% more ore than Q` and at a 29.4% higher grade (cash costs fell 35.5% quarter to quarter). First phase of the project commences producing the last quarter of 2012. 2012 production for NAP is expected to be in the range of 190-200,000 ounces. The company's other operating mine, Sleeping Giant is part of its gold division and is located in Quebec. Sleeping Giant has very high cast costs (over 1550/oz) because ore grades have been low (but will climb due to deeper access later on). Sleeping Giant was acquired in 2009 from iamgold (expected to produce 40-50,000 ounces in 2012). (Miningweekly: NAP expects palladium output to rise 75% this year) Total palladium production by NAP was 95,100 ounces in 2010 but is forecast to increase by 75% in 2011 to 165,000 ounces, palladium cash cost in 1Q11 was $519/oz but that dropped to under $400/oz by Q2. NAP has operated in Thunder Bay for over 17 years. Overall production costs for NAP are forecast to drop to $125/oz from $325/oz in 2009 (60% decrease). ( North American Palladium Mine Celebrates Reopening) Between November 2010 and February 2011 North American Palladium stock increased by 51% on the back of higher palladium prices (week of January 30,2011 spot price was above $800/oz). The other gold mine, nicnamed Vezza is located just north of Sleeping Giant. The whole Vezza-Sleeping Giant region contains 1.379 million ounces of M&I + Inferred gold but 2P reserves are only at 52,000 oz so a lot of investment is needed to upgrade resources. Vezza isn't expected to come on tap until 2013 but when it does it will immediately add about 40,000 ounces of gold to production (combined with Sleeping Giant total production could be as high as 80,000 ounces). Palladium production: 95,057 oz (2010), 145-165,000 oz (2011). About 90% of revenue comes from palladium (4Q10 revenue: $35.2M from LDI, $4.2M from Sleeping Giant).

Norilsk - One of the world's main sources of nickel also supplies the world with 11% of its platinum and 20% of its palladium. 2P reserves: 68.457M ounces of palladium (55.018M oz) + platinum (13.439M oz). (Norilsk 2011 Fact Sheet) In 2010 9% of Norilsk's revenue came from palladium (compared to 12% for platinum; largest was nickel at 53% and copper at 24%, gold was only 1%). Norilsk accounts for virtually all of Russia's production right now with the other 3 Russian companies having resource problems. In Russia and South Africa palladium is produced as a by product of other production (platinum/nickel), only a few of the world's mines focus on palladium as the primary source.

Anglo Platinum - One of only a few companies that actually increased palladium production in 2010 (by 9% up to 1.485 million ounces - 2.5699 million ounces for platinum also up but by half as much 4.8%). Rhodium produced: 329,000 oz down from 350,000 oz in 2009. 2P ore reserves (platinum, palladium and rhodium (2011): 165.5M oz down from 170.5M oz in Jan. 2010: 53% of 100% owned production reserves are at UG2 Reef (there are four sources in total). There's also another 0.8M ounces at a tailings facility and about 5M ounces stemming from interests in a mine named Unki. In addition there are antoher 620M ounces of measured and indicated resources. In fiscal 2009 Anglo's revenue fell 28% to R36,947M under R39,000M for the first time since 2005; gross profit margin down to 5.4% from 33.7% owing to the global financial crisis reducing demand and prices starting in late 2008; prices and demand didn't recover until the second half of 2009. Cash from operations fell from over R18,000M to under R6,000M in 2009 the lowest level in more than five years. Anglo Platinum ranks third among major producers in terms of its PGM reserve life, 36 years which lags only Anooraq (47) and Stillwater (40).

Tuesday, October 4, 2011

Only 1 of 4 Greek Bond Options Attracting Private Investment (coupon of 5% for last 20 yrs) & Update on Greece: Is it doing enough to avoid a default (austerity measures)

   Private bond holders are choosing overwhelmingly only one of the four bond/coupon options being offered by the Institute of International Finance (the one with the highest payout; payout is 5% annually for the last 20 years, 4-4.5% for the first 10), complicating things for the euro zone which previously made a deal with holders of Greek bonds built on the assumption that investors would show just as much interest in the other three (proposal was first made July 21, the other 3 options though having the same net present value, would've provided more flexibility for the eurozone). (Reuters: Investors chose most expensive Greek debt option) The other 3 options are discount bond exchanges rolling over into other financial instruments over the next 15-30 years. Private sector involvement is important considering that over €189B is expected to come from that source before 2020. Greece is issuing the bonds at a 21% net present loss. Any restructuring of deals with bond holders would certainly get a negative response from the markets where there's already speculation that Greece's bailout creditors are trying to shift more of the losses over to private bondholders. ( Greece's Debt Inspectors Back in Athens on Thursday)

As of today (October 4, 2011) Greece only has enough cash to cover expenses through November (the bailout tranche for November was €8B ($10.9B). The next round of bailout money to keep Greece out of default after November, was put on hold in early October due to news that Greece's deficit for 2011 will be 8.5% of gdp (€18.69B which is higher than the 7.8% of gdp/€17.1B deficit projected earlier); News of the higher deficit was also made worse by the fact that Greek gdp contraction will be greater than first thought (5.5% smaller than 2010 gdp versus the anticipated 3.8% recessionary figure). Greece's gdp shrank for 12 consecutive quarters (last quarter that recorded growth was the one ended August 2008); In contrast Germany's gdp hasn't had a problem growing (two consecutive quarters as recently as January 2011 (ended) when it grew 4% & 3.9%. For German bonds, as of February 14, 2011 the 10 year yield was 3.33% (highest since Jan.14, 2010), 2 year yield 1.41%. Between January and mid February 2011 investors made a 4.3% return from Greek bonds, 0.8% from Spanish and 0.1% from Irish but lost 2.1% from German bonds. The eurozone's rescue fund, which has already provided aid to Ireland and Portugal, is €440 billion ($595B) in size. Also anounced on Tuesday: US Fed will purchase up to $5 billion worth of 8-10 year treasury notes (Due between November 2019 and August 2021) in an attempt to lower long term borrowing costs (buying more bonds helps to lower yields/interest rates). Belgium and France stepped up to the plate when Brussels-based Dexia faced problems stemming from their exposure to Greek debt). The shift over to US treasuries as a safe investment haven (30 year long bond) lowered yield rates to 2.70%, the lowest the yield has been since January 2009. (Bonds rise as Greece debt woes spur bank fears)

This question has come up a lot: Is Greece doing enough to reduce the deficit and finally take responsibility for its own debt? I think it has but I'll let you decide.

Pensions: 1. 20% of any amount over 1200 euro will be taken away (ie €2000 pension will be lowered to €1880). Only about half a million Greeks get pensions over 1200 euro. 2. Pensions going to people younger than 55 will lose 40% of any amount that exceeds €1000 while another three million pensioners will be affected by auxillary pension cuts of up to 50% (that loss is just the beginning for those three million because their pension funds are already insolvent). When people retire they sometimes receive lump sum payments, that will be lowered anywhere from 20% to 30%.

Taxes: Taxes will be rendered on 855,000 low income earners for the first time ever after the tax income threshold was lowered from €8 to €5000 (annual gross income). There's also a reduction in the tax free allowance from 12 to €8,000 that will levy an additional €700 in annual tax burdens on those Greeks affected. Net monthly pay lowered by €150 as early as next month for nearly all of the salaried taxpayers represented among the 855,000 people affected.

On Sunday October 2, 2011 the Greek cabinet completed a plan to reduce staff in the civil service by 30,000 overall. (KCTV5: Greek deficit projected at 8.5% of GDP) That figure seems unfathomable considering the public transport employee representatives stated on September 22 that their staff is already low, 20% lower than it was just a couple months ago.

Here is where Greece is coming from. Last year they had 800,000 civil servents collecting $48,000 annually in full pensions, those pensioners became eligible for that at age 52. New austerity measures are likey to impact those people significantly. European banks typically leverage about 80 times (debt used to acquire additional assets), that puts the EU in a more preciarious situation than the United States (40 times leverage).

Making matters worse