Allen Phatimer

Allen Phatimer
Contributor since: 2008
the energy equivalent rule of thumb you cite, I think applies more so when all else is equal which it is not. The supply/demand/inventory situation is different in oil and OPEC is different in oil and geopolitical risk is different, etc. - that's why the energy equivalent ratio link has broken down as much as it has. The global economy is also different as is the view that there's no spare capacity and we're running out of oil so I'm not sure that oil prices north of $55 are sustainable in the short to intermediate term. So given my outlook I don't expect the relationship to converge much anytime soon. I'll be surprised and wrong on my call if we see less than 8 to 1 within the next year. I also tend to think that the marginal global energy demand has come from transportation fuel requirements which natural gas hasn't been able to displace. And I don't disagree that CNG vehicles should proliferate but the fact is they are not coming on in a big way fast enough to have a significant impact. Thanks for reading and commenting.
On Apr 02 07:01 PM E.D. Hart wrote:
> Let it be stated that Oil is trading at above 50 a barrel and has
> improved from 35 in October/November. Watch oil to see what gas might
> do, as oil becomes more expensive, natural gas looks like a cheaper
> alternative. Oil above $50 implies gas above $5 .At an energy equivalent
> price oil above $50 implies gas above $8 (50 divided by 6) .
> Conclusion: if oil stays above $50, I expect gas to be in the range
> of $5-$8. This is more likely in my view than gas in the 3-5 range.
Agree. XTO is no question a very good company - excellent assets and very well managed. And smart enough to hedge very well and put themselves in a position to generate big free cash flow in very bad market conditions this year as they have hedged most of their '09 production (80% if I recall correctly) north of $9/mcf. With a lot of cash and strong cash flow this year they can easily handle interest on $12B of debt on their balance sheet. Now if price realizations in 2010 are closer to $6/mcf then cash flow can easily be halved or worse because expenses are not coming down nearly as much or as fast as revenues and cash flow will. In that scenario, their valuation would be under substantial pressure. If they didnt add the assets and debt they did I would be more inclined to think the takeout risk would be too high to play it for a short trade because they are a very good company. Thanks for reading and commenting
On Apr 02 02:58 PM jimboy wrote:
> Surely the key point here is balance sheet strength - who, of all
> the players, has the biggest "margin of safety" in terms of cash
> on hand to pay their way if prices stay depressed or fall for longer
> than expected and also to take advantage of the upturn? Husker Mark
> won´t be able to sit back and collect the dividends of some of the
> companies go bust. Is this a possibility?
My bearish call is on the stocks which appear to me to be discounting a speedy rebound in prices to $7 or $8/mcf which I think is highly unlikely. That being the case, I think there is a big disconnect between the equities and the commodity. The market will eventually correct but I doubt very much that happens before producers largely unhedged for 2010 are forced to hedge at prices below $6/mcf which will make earnings estimates way too high and multiples too rich. Unhedged producers with heavy balance sheets have already reflected a lot of this but all the hope you mentioned has kept the good houses in the bad neighborhood up as if they are bullet proof so thats where I think the opportunity is. I've been bearish on nat gas for a while and I don't want to overstay my welcome because it will surely cost me. If you are correct about a rebound in demand and hurricane related supply disruption and green related meaningful incremental demand, then I'll be wrong. And if consolidation picks up sooner rather than later then I'll get smoked one day; but I don't think we are close enough to the bottom that I should't stay short, rather I think expectations, valuations and fundamentals are such that I should press this short so that's what I'm doing. In the next couple of months I hope to be covering some shorts lower and probably pairing whats left with a long; as optimism turns to disappointment and to hope again but not here and now. Thanks for reading and commenting.
On Apr 02 04:25 PM Mike T wrote:
> And what happens to all of those shorts if and when we get another
> Gulf hurricane? All of this silly $2 handle stuff implies no increasing
> demand, no decreasing drilling, and demand destruction. The greens
> are out touting sustainability and oil to gas every minute of every
> day. Do what you want in the short term. I see UNG as an easy 1-2x
> from here...not today, not tomorrow, not next month, but given ANY
> recovery, it's bound to recover. The more the CNBC hawkers pimp
> $2 natural gas, the more I buy right here, right now.
thats essentially the call. Many were banking on a big rebound in late 2009 and 2010 prices but the fact is 2010 prices are likely to be much lower than hoped and most would thus be barely if at all profitable - those names shouldnt trade at multiples of revenue if not big recovery is imminent
On Apr 02 10:15 AM Ranjit Thomas wrote:
> Agree with the article. RRC and HK seem to be the most overvalued
> at 40+x EPS and 5x revs. And this includes the benefit of significant
> hedges this year. As the hedges roll off, bankruptcy is a possibility.
good luck with that, let me know when you do
On Apr 02 09:57 AM yblarrr wrote:
> Taking your article as a sign to go long.
I think they are wrong and I'll explain in an article detailing why shorting natural gas stocks makes sense
On Mar 20 09:51 AM kelm wrote:
> You may want to take a look at the article form Bloomberg stating
> that 45% of the US natgas rigs have been shut down due to low prices
> and predicting a doubling of prices in a year based on decreased
> supply.
> Gold was in a downtrend and the fundamentals were in agreement with
> that trend (India now EXPORTING bullion, etc). I think the gold rally
> at this point is speculative.
> Inflation yes, possibly massively but it will take some years to
> really get going. If Zimbabwe takes decades to get hyper-inflation
> going it will take us some time to - if we get that far.
> At some point treasuries are a great short but that is dangerous
> business with the Fed playing I the sandbox right now - I know...
The editor entered that incorrectly - I tried to disclose long GG and AUY and short TLT. It should've been long GG and AUY and short the TLT (tried to fade the sharp drop in yield/jump in TLT) and participate in gold's run to 1150.
On Mar 20 09:18 AM ScroogeMcduck wrote:
> I'm confused. You say you bought GG and AUY and you want to short
> the TLT but you only Disclosed being long the TLT
The point you make promotes the same misguided policies that as henarl pointed out turns out walmart employees and folks that create electronic entries and paperwork. Less people making less to produce more (productivity) is great for the business owner, but it is not in the best interest of us as a nation. When you forsake the ability to produce labor intensive goods you also give up the ability to innovate in the future and create value accordingly. You give up the ability to add value (however small) at each step in the value chain. You can bet your half baked theory that someone will create significant innovations in autos, machinery and the like at some point and it wont be us. There are universities in China that have majors in things like bra engineering - and they now produce differentiated, value added bras that our wives spend $50 and $60 in Vicki's hush hush. For now that value creation is being split nicely in the retailer's favor but its a matter of time till there are bootlegs available for half that price and it then becomes the beginning of the end of another American company. Once upon a time the brits were good manufacturers and had a strong economy, as were the Germans, as were the Japanese and others. As their manufacturing base lost its luster, so too did the economic growth, and real incomes. These countries became second rate economies where too many battle for too few jobs and wages and standards of living collapse. It isn't long till too few are left who can afford the few things still produced domestically. Don't lose sight of the fact that one's spending is another's revenue. The view that we will retain high value added, high paying jobs is naive. The Chinese, Indian's and Brazilians amogst other now have not only cheap labor, but also knowledge, technology and capital to knock off almost everything. As they do, they will put more U.S. businesses and consumers out of commission. Of course we are using technology and a better educated, more industrious workforce to produce more efficiently and that much is a good thing. But make no mistake about it, the driving force of much of this is little more than labor arbitrage with unintended consequences that will haunt us for years to come because those jobs arent coming back and we aren't manufacturing jobs to replace them. Employing more Americans which earn a better living than walmart cashiers and greeters, to produce more goods to sell to everyone else globally is a better economic situation for most Americans and us as a nation in the long run than the opposite scenario.
The article's premise is a joke. There were a ton of new activist investors that thought they could buy a big stake and convince operators of businesses to take a shortcut to value creation via some form of financial engineering or another. Most of these guys have gotten smoked many times over because the game is not played on paper. Blocking and tackling is a little harder than it looks. These twenty something hedge fund geniuses assume that managements of companies who generate buckets of cash the old fashioned way (through earning it) can't do the math of share repurchase or are too stupid to realize that they can put their firms on the precipice of bankruptcy by leveraging it to the hilt in order to increase EPS and return on equity without increasing net income or return on capital. Of course there are companies out there with potentially greater intrinsic values were it not for dumb managements that pay themselves excessively not to create value or allocate capital well. But those are not where most activist attention is focused. Then you have the activists who play a glorified game of pump and dump - acquire a large stake in an apparent value, pump out a few press releases, and hit he CNBC circuit and then sell as copycats fall over themselves to piggyback these. The problem with thinking we are on the cusp of a golden age in activist investing is that's its all much easier said than done AND current macro conditions are apt to buy many managements time, while otherwise valuable franchise managements will be reluctant to sell on cyclically depressed multiples. Furthermore, if low valuation is your first reason, then why not be a passive investor in better managed companies which are inherently significantly less risky. In the real world there are many more bad businesses than most want to believe and industry and macroeconomic forces are bigger than either management or hedge funds that want to fancy themselves activist investors. Its amazing how many grand opportunities hedge funds can burn other peoples money on. Activist investing will remain a niche. There's a lot of playboy centerfolds out there who like the average joe the plumber, are more desperate than ever, good luck finding one with a big bank account that will cook, clean, pay your bills and faithfully love you long time. Again, the game is not played on paper; you have to block and tackle and overcome all kinds of seen and unseen obstacles to score.
Very nicely done - nothing like a few facts to put things in perspective. I agree with most of what you said.
On Jan 25 08:23 AM TMM wrote:
> From Mish, globaleconomicanalysis...
> Adam Hamilton at Zeal is predicting Big Inflation Coming.
> The growing legions of deflationists see an unstoppable depression-like
> deflationary spiral approaching like a freight train. They cite some
> convincing data. The stock markets have been cut in half in just
> a year. In the past 6 months, some key commodities prices fell farther
> and faster than they did in the entire Great Depression. House prices
> are down by double digits across the nation, with no bottom in sight.
> And credit is a lot harder to come by today than in any other time
> in modern memory.
> My Comment: Well yes, that is convincing data. Indeed a perfect 15
> out of 15 conditions experienced in the great depression are happening
> today as discussed in Humpty Dumpty On Inflation.
> Of course Humpty Dumpty can and does pretend that deflation is specifically
> about money supply, totally ignoring credit. And those same Humpty
> Dumpties were amazed by the collapse in commodities and were crushed
> shorting treasuries because they did not see this coming.
> In light of these universal falling prices, how could we not be entering
> a sustained deflationary period? The case may seem airtight, but
> I’d like to offer a contrarian view in this essay. Believe it or
> not, despite 2008’s price collapse there is plenty of overlooked
> evidence suggesting big inflation is coming. You won’t hear much
> about this on CNBC, but it could have a big impact on your investments
> in the years ahead.
> My Comment: I am not sure what Hamilton means by "sustained". We
> have been in deflation for about a year, and maybe it lasts another,
> or five. Then again, perhaps we drift in and out of a slow growth
> recessionary period much like Japan for a decade. We have to take
> this one step at a time.
> Inflation and deflation are purely monetary phenomena. Inflation
> is not just a rise in prices, lots of things can drive prices higher.
> Inflation is the very specific case of a rise in general price levels
> driven by an increasing money supply.
> My Comment: That last sentence puts the cart in front of the horse.
> Inflation is not rising prices; rising prices are a result of inflation
> (an increase in money supply and credit).
> Acknowledging that debt-financed house prices are a special case
> that may indeed be deflationary (contraction of credit), I am focusing
> on stocks and commodities in this essay. From October 2007 to November
> 2008, the flagship S&P 500 stock index plunged 51.9%. About 4/7ths
> of these losses snowballed in just 9 weeks during the stock panic.
> From July 2008 to December 2008, the flagship Continuous Commodity
> Index plummeted 46.7%. Almost half of this mushroomed during the
> stock panic.
> Deflationists argue these price drops are proof of deflation, and
> most people today believe this. But they are only deflationary if
> they were driven by a contraction in the money supply. Stocks and
> commodities are generally cash markets. Credit such as stock margin
> can be used, but it is trivial relative to the market sizes. And
> real commodities purchased for industrial uses are paid for in cash
> or near-cash (short-term trade loans), not multi-decade loans like
> houses. So the money supply during 2008’s slides is the key.
> My comment: What deflationist has argued that commodity price declines
> are proof of deflation? Can I have a name? Most mainstream media
> is concentrating on prices.
> More to the point, no single indicator alone can constitute proof.
> However, 15 out of 15 symptoms one might expect to see in deflation
> should be ample proof for anyone.
> If available money to spend indeed contracted, then the deflationists
> are right about seeing deflation in 2008. But if the money supply
> fell by less than stocks and commodities plunged, was flat, or even
> grew, then deflationists are wrong. When prices fall simply because
> demand declines (too much fear to buy anything immediately), this
> is merely supply and demand. If money didn’t drive it, then it isn’t
> deflation.
> There is the humpty dumpty argument again. And again I reply that
> it is foolish to ignore credit (debt). Debt is actually more important
> than money simply because it dwarfs base money. And much of that
> debt cannot be paid back and that is why banks are failing.
> Come to think of it, I need to add bank failures to my list. That
> makes a perfect 16 out of 16 things.
> The key point in this rebuttal is that money supply does not have
> to shrink to cause deflation unless you insist on a humpty dumptyish
> definition that has no real world practical application.
> Here is a practical application: There is no money to pay back loans.
> What cannot be paid back will be defaulted on and the default avalanche
> has been triggered. Once an avalanche starts, it is impossible to
> stop.
> That avalanche of defaults amounts to deflation if it exceeds the
> expansion of money supply.
> Banks are attempting to hide the avalanche by not marking their books
> to market. Citigroup alone is sitting on over $800 billion in SIVs
> of dubious value. However pretending credit will be paid back does
> not make it so, just as ignoring an avalanche does not stop it.<br/>
> Hamilton goes on and on with straw man arguments about what deflationists
> believe. In practice I do not know a single deflationist who believes
> the strawman Hamilton is rebutting.
> Hamilton also talks about various money supply charts as if they
> are proof of inflation. Here is my rebuttal.
> Base Money % Change From A Year Ago
> Hamilton's definition shows there was massive inflation during the
> great depression, starting in 1931!
> Of course that is ridiculous. But it is what one must conclude if
> one defines inflation as an expansion of money supply alone.
> That chart shows why it is foolish to look at one indicator as proof
> of inflation. A more practical approach and a more practical definition,
> gives more practical results.
> Soaring base money supply is not proof "Big Inflation Is Coming"
> soon, just as it was not proof that "Big Inflation" was coming in
> 1931. There cannot possibly be any other logical conclusion when
> confronted with the data.
> Mike "Mish" Shedlock
> globaleconomicanalysis...
> Click Here To Scroll Thru My Recent Post List
Great common sense commentary for anyone with a real economic bone in their body. I had to reply to your comment because you were the only one on the page of 100+ comments to refer to purchasing power at all. That is a sign of what semantics and a lack of grounding in truth and reality does to otherwise well educated people. And I'll say upfront that I agree that the inflation we all know but don't love is apt to surge in a way that can put us in a banana republic sort of conundrum; I just am not convinced it's around the corner, because I think the current economic circumstances is likely to suppress demand more and longer than most think, credit has changed dramatically, and there is likely to be a transmission problem with regard to getting that credit into enough hands that can overwhelm the enormous amount of excess capacity in product, service and labor markets that have been created almost overnight. So there's no telling how long deflation (not the asset kind, but the kind that increases purchasing power meaningfully) is apt to persist because this is anything but a free market economy anymore - ie. the Fed is likely (IMO) to be successful in keeping rates low and the dollar from collapsing in the near term. But some day in the not too distant future inflation will get going and it will inflict pain of the non-theoretical kind - your and my pocketbook and bank accounts and by extension our quality of life. Its just near impossible to predict when and to what extent but also how far and long deflation goes before it turns. My guess is that wont happen until the economy here and globally improves - which I doubt happen anytime soon. People looking for a 2nd half recovery are way off; we'll be lucky if happens by year end 2010 IMO.
On Jan 26 03:48 PM Chris B wrote:
> 1) "M0, the narrowest measure, is usually called the monetary base.
> It is simply currency (coins and paper dollars) in circulation and
> in bank vaults plus reserves commercial banks have on deposit with
> the Fed."
> M0 includes bank deposits at the federal reserve banks. Do you think
> any of the trillions of dollars that have exited the derivitives,
> stock, bond, and commodities markets were deposited in these accounts?
> If some of the growth in M0 and MZM was caused by banks converting
> their riskiest assets to cash, is that really the same as money printing?
> It looks to me like the government accounts used to keep banks' required
> reserves have become the hottest new place for banks to hoard cash
> safely! Keep in mind, since the repeal of the Glass Steagal Act
> of 1933, the investment banks and the commercial banks with Federal
> reserve accounts are one and the same. Most of the TARP funds are
> still sitting there.
> 2) "Ride the coming inflationary wave. Some of this deluge of new
> money will flow into beaten-down stocks and commodities. I like both
> since they were driven to such irrational prices in 2008."
> That's certainly contrarian! You're predicting a currency devaluation
> like Argentina, Mexico, or Russia in the 90's and you think stocks
> are a good place to hide? Would domestic stocks priced in domestic
> currency have been the right investment to make for people in those
> countries when their currencies and economies collapsed? No. A
> passport and lots of USD would have been best.
> If you are positive that we are about to experience a currency collapse,
> the rational thing to do would be to take on as much debt as you
> can and convert to another currency (or just buy forex options that
> would pay off big). When your home currency collapsed your debts
> would be cheap compared to your foreign currency and you'd be left
> with much more purchasing power than you started with.
> Regarding commodities, the collapse of an economy the size of the
> US would do strange things to supply and demand, so oil could underperform
> inflation. As far as precious metals are concerned, portability
> and security could be problematic (imagine 50lbs of metal in your
> carry-on luggage at the airport as you try to escape the country!).
> However a few coins for bribes wouldn't be irrational.
Thanks for the candid synopsis of an insightful interview. Its great to hear about how influential leaders think about business models and strategy. Good stuff and should I say: Well Done, Well done! (w/ a Brit-ish accent)
For what its worth - its not as simple as it appears you think. Of course buy and hold looks like a losing strategy in a bear market but that same bear market will set up many phenomenal buy and hold opportunities. Even Warren (my investment horizon is forever) Buffet sells stocks on occasion. There are a great many ways to skin a cat in this business - some trade, some invest, some do both. I try to do both as well as I can because I think it makes sense to use solid trading cues to optimize entries as well as minimize risk. Whatever you decide to do as you are learning, do it with minimal money because mistakes cost real money and I can assure you that you are much more likely to make mistakes than you are to get lucky. Create a trading plan, then paper trade and analyze your results for a couple of years before you go all in. Try to minimize mistakes. This is not an easy game even for experienced pros. I like to try to catch big moves in names I know well. I do the fundamental work of understanding a business and the industry it operates in and then wait for an opportunity in valuation and/or emerging technical improvement. It takes a lot of study and diligent analysis as well as historical references. It takes many years before you really see charts and financials the way they are meant to be seen. In the meantime you'll be winning and losing the wrong way as they say. You're thus likely to develop bad habits and biases which will cost you money. There are a great many nuances that make conventional wisdom a tricky guide and a great many rules of thumb that kill. Try to learn as much as you can before you decide on a holy grail. Read the articles I wrote on individual stocks.
On Jan 25 06:52 AM ATWshop wrote:
> There is one simple line of advice that will keep investors out of
> the fire.
> *** Trade what is happening...Not what you "think" is going to happen
> ***
> This is NOT a time for Buy &amp; Hold investing!!! This is a time
> for TRADING - buy on the dips and sell on the run ups! The days
> of Mutual Funds is fast coming to an end. They just do not have the
> flexibility to react to this type of market.
> If you develop a "Trading" type of doesn't matter
> which way the market goes. It only matters that there is movement
> and you, as the Investor are able to take advantage of those moves.
> Will you get 100% correct = No. But taking a "Passive" approach is
> a poor investment choice! Learn how to use Stops and Trailing Stops
> to your advantage.
> We need more articles about Proper Trading Techniques to help educate
> the general investing public... no author can call the market with
> any amount of accuracy... Just my 2c worth.
So you suggest I'm making much ado about nothing. You're entitled to your opinion and I respect your view but I think (and time will tell who's correct about this) that your sentiment reflects much of what I hear and see both in the financial press as well as the traders and investors I know. I think I have a pretty good reference point as I speak to professional (present and former buy and sell side analysts and PMs), as well as many non professional investors regularly. The inspiration for what I wrote was precisely the widespread complacency I witnessed a few weeks ago and obviously still do. Too many people have and continue to believe that 'the market' always comes back stronger and its too late to reduce market exposure so might as well stay the course. I think most don't fully appreciate the magnitude of economic pain that is to come this year when employment, consumption, output and corporate profits decline throughout 2009 and into 2010 and the adjustments take much longer than those who share your view think. Our economy has changed in big ways. If you don't appreciate that now I think you will soon see that structural changes have altered income, credit, consumption, saving, investment and risk taking dramatically - all of which is very likely to lead to much lower output which coupled with personal and business balance sheet constraints, will require lower per capita consumption and investment. This has huge economic implications and is the reason that I and a good number of serious economists (and I'm not suggesting I am one) feel scared like never before. So the inventories going to zero non-real world theory is going to cost you (if you're poo pooing the idea of more risk aversion being the prudent course here) for concluding that the worst is over as far as supply demand equilibrium is concerned in any market (including labor and manufacturing). Inventory to sales ratios have declined almost continuously for a couple of decades now, yet that hasn't prevented minor cyclical swings from creating enduring excess capacity. Now you have the mother of all cyclical economic downswings, and I'm suggesting that its a secular thing which will last longer and be more painful than most think. Home builders, auto makers, retailers and almost all things high tech, though keenly aware of sharp sales slowdowns, cant reduce inventories fast enough. Inventories will adjust as production decreases, but that will take time still. And I think that you will thus see excess capacity in almost everything, including labor, for a long time. With that pricing power will be almost non-existent. Businesses will sell less at lower pricing and will have a very hard time dealing with negative operating leverage. If I'm correct about that, then corporate profits will remain under pressure longer and equity multiples will compress further. Sure you'll find good values, but they be scarcer than you think and many apparent values will turn into traps quickly. So my message is better re-consider how aggressive or defensive you should be; but to each his own, good luck. Thanks for reading and commenting on my article; appreciate that.
On Jan 23 10:47 AM Steve Pluvia wrote:
> Allen, history is littered with forecasts such as yours; the take
> home is this: you're better off trading what the market gives you
> rather than trying to guess what will happen. The most accurate
> sentence you made:
> "I can’t recall a time when equities have gotten pummeled to the
> extent they have and other assets are as attractive as they are..."
> There has never been a comparable set of events, obviously you could
> not recall such a time. The first big point you miss is this: economic
> downturns produce zero inventories. As Stim packages kick in demand
> will outstrip supply and we're back to the races. The second big
> point you miss is we are in a new market era. There has never been
> a world economic recession/recovery during our current era of lightning
> speed internet information. In this new era buyers from the world
> enter and exit markets in a manner never before possible. Stock
> market booms produce wealth faster than any other event. Worldwide
> market access = more market buyers = greater demand = 1999 on steroids.
> This is not your father's economy or stock market.
Not contradictory at all and I didn't think I needed to think twice about it when I wrote it; but I could be wrong. The idea is that hedge funds are much more levered than many mutual funds aren't. There aren't many mutual funds that partake in the 130/30 or 150/50 strategy so if assets are shifted to mutual funds from hedge funds then there will be that much less demand for equities, ergo, less money in the game to support equities. Thanks for reading and commenting. If I'm missing something, feel free to let me know. thanks
On Jan 21 08:50 PM sr9web wrote:
> "Another reason why I doubt equities can snap back a lot anytime
> soon is because I can’t recall a time when equities have gotten pummeled
> to the extent they have and other assets are as attractive as they
> are. Investors that lost 50-60% in what was supposed to nimble “HEDGE”
> Funds (which didn’t hedge well) are going to be done with them in
> many cases and shift money back into the mutual funds (which have
> much less leverage) which never lost that kind of money for them."
> Think this through - you are contradicting yourself.
Last thing I'll say about this is that the "delivery" doesn't change much at all, so it makes little if any sense to keep focusing on that as a reason that speculators had nothing to do with a bubble move to $147. The only people that take delivery are those (refiners) that will refine the crude into gasoline, heating oil, jet fuel, etc. So the fact that specs don't take delivery is neither here nor there as it relates to speculators ability to affect prices. I understand your position; I get it - speculation had nothing to do with it.
On Jan 14 09:48 PM Gary Lucido wrote:
> Nope don't buy it. First, demand is clearly much lower now than it
> was when oil was 147. Opec is cutting back and inventories are building.
> It doesn't take much demand change to move the price a lot when the
> supply and demand curves are fairly inelastic. Second, let's walk
> through the mechanism in detail that must occur in order for speculators
> to drive up spot prices. It doesn't make sense. Let's say demand
> is stable and suddenly speculators start buying futures contracts
> that they never take delivery on. If the demand is not there spot
> prices will not rise because no one is taking delivery on those contracts.
> You would end up with significant contango but as soon as the front
> month settled the prices on those contracts would crash to the spot
> price. The spot price is only going to be affected by real demand
> - unless people start to store oil for future delivery in which case
> inventories would rise. However, there was not contango at the time
> of 147 oil and inventories did not rise. There is no mechanism by
> which speculation can move spot prices unless that speculation reflects
> real demand - in which case it's the demand influencing speculation
> and not vice versa.
Although I don't know enough of the chemistry and engineering involved to have an educated opinion about the debate between which technology is superior from a price performance perspective, I do agree with your premise that America needs to have a horse in this race and appreciate your thoughts, as well as, the discussion that it initiates. Thank you for taking the time to spark this excellent dialogue.
Good points, thanks for added value to the discussion
On Jan 14 11:16 AM kingaj wrote:
> Steep price movements are pretty standard for energy as soon as you
> get close to capacity. Look at electricity spot on a hot day. The
> problem is lack of ability to switch between alternatives, and the
> low slope of the demand curve relative to price.
One more time Gary, and don't take this personally. Although I'm not an "oil expert", I've followed oil and other commodities closely for 10 years now and traded commodities more often than most over that time. I've had the fortune to learn a lot the energy markets directly from many analysts you've seen and still see on CNBC in that time. I'm on this again because I think it would be a shame if people believed what you say because you are dead wrong in saying "But the only way that the spot market can follow the front month price is if the demand is there to justify the price." and use that as a point to support the idea that it was purely supply and demand or the value of the dollar (which I agree is a critical factor as I said) which caused oil to run the way it did and specs had nothing to do with it.
The spot market does follow the front month price because it is almost the front month price. Real demand does not pay a crapload more for oil a month out because it can wait or buy spot and store. And its not about 'EVIL" speculators - I never said a bad thing about speculators. It was about 3 writers on the front page of seekingalpha knocking a fair characterization of what added fuel to the fire of the oil bubble without dealing with many facts that proved beyond a reasonable doubt that speculation was a key factor. Oil went from 80 to 147 and back to 35 in a few months. Please tell me exactly how much supply or demand changed in that time. The answer is not at all. By the way, a similar thing is happening right now but interestingly not having as positive an effect in the short run as one might suspect - speculators in the physical markets, like the Morgan Stanley's of the world are chartering as many tankers as they can and buying spot which they are arbing against a steep contango out to June or so. The numbers work because the contango is steep and tanker day rates have declined dramatically. The spread is actually quite wide and this dynamic would normally close that gap by lifting spot and near months. Whats interesting to me about this is I think it suggests that the market will be more awash in oil by June that most think, and the price might not bounce back as much as most think.
Although I've always been a big fan of Byron Wien's, I suspect his and many others calls for $80 oil by year end will look like a very tall order when we are still in the mid forties in June. And that's not to say I don't think oil is probably a good value here; but a return to $80 anytime soon is probably going to require a collapse in the dollar WITH stability or improvement in the global economy. The article I posted last week on '09 explains why I doubt very much the economy improves anytime soon; in fact I think it gets a lot worse.
On Jan 14 07:49 AM Gary Lucido wrote:
> But the only way that the spot market can follow the front month
> price is if the demand is there to justify the price. If evil speculators
> are artificially driving up the price then there is no real demand
> to keep the two in sync.
I agree with most of what you say but don't think politicians clamoring for coastal drilling had anything to do with it. The little oil that would come from such pursuits wouldn't come for years. And lack of coastal and offshore acreage wasn't the reason oil companies chose not to drill more in North America. Miles and miles of leased acreage has sat idle for years. Oil companies lobbied for coastal drilling becasue the acreage would effectively be given away to them. I can assure you that oil guys don't want anyone drilling more anywhere today. Nothing moves speculators, investors and traders more than prices. The energy market didn't go the other way because a few election year politicians started saying drill baby drill.
On Jan 13 10:47 AM misolarman wrote:
> Speculation is based upon some market reasoning. It is not like
> the days of the tulip bulbs. If it weren't for three billion people
> throughout the world experiencing year after year of double digit
> standard of living increases (increasing their oil consumption in
> the process), and oil production being stagnant, then speculators
> would not have had the motivation to do what they did. It is because
> of them that our extremely inept and inefficient do nothing congress,
> got off their lazy rear ends and started moving towards opening up
> new areas for drilling. This had an immediate reaction taking wind
> out of the sales of the speculators. Combined with the economic
> downturn the oil speculators trade vanished. What I am afraid of
> is with prices down our congress will once again put their brain
> dead heads in the sand. Once this happens and the economy turns
> around, I will be one of those speculators. It is because of them
> that domestic production will eventually increase, saving us from
> an even larger catastropy.
60 minutes explained it pretty well. The arguments of there's always a seller for every buyer and they never take delivery are so amateur that you guys embarrass yourselves when you spew that crap. Think about what you're saying before you regurgitate what you heard another fool say. Let me make it really simple for you - SPECULATIVE ELEMENTS THAT BUY AND SELL A NEW PARADIGM TYPE LINE OF CRAP ARE KEY CONTRIBUTORS TO BUBBLES. Your buyer and seller for every transaction line suggests that buyers don't move prices higher and sellers don't push prices lower.
I NEVER SAID THAT SPECULATORS WERE THE ONLY CAUSE OF THE OIL PRICE SPIKE. I SAID THIS: "The fact is that no one really knows when the world will run out of oil. Many factors influence energy prices over the long run, including production costs, the dollar, supply, demand and competition from alternatives, etc. But bubbles are usually borne of cyclical (and ALWAYS temporary) supply/demand imbalances exacerbated by analysts and pundits who con otherwise unsuspecting investors and traders with new paradigm type stories."
By asserting the naive buyer and seller and delivery crap you are saying that speculators either don't exist or have no effect, which is naive. As pension funds and endowments and CTAs, and Hedge Funds (levered to the hilt) and brokerages and others buy into the madness, the buyers outnumber the sellers in a big way. Pension Funds, Endowments and non-commodity hedge funds should have never been involved - by getting involved to the extent they did, they became SPECULATORS. They talked about a commodity bull market that would last for another ten years. They declared commodities to be a asset class that should be well represented in everyone's portfolio no matter if you were a gunslinger or widow. They were dead wrong. How many of those guys do you suppose are still "holding for the long term" like non-specs do. Commercial and Speculative open interest increased much more than the 2% average increase in end market demand (demand was strong and Chinese were buying and we and everyone else was filling SPRs).
Consumers do NOT buy oil; they buy refined products like gas and heating oil; the demand for which did not increase or fall anywhere near as much as they amount of energy futures did. If prices tracked end market demand alone, then you would never see anything like the parabolic move you saw. Calls for $200 and $300/ bbl oil were as absurd as calling for AMZN to go to $1000/sh. back in the internet bubble immediately before AMZN proceeded to give up 90% and fall back to $10. If that sounds stupid in retrospect its because it was.
On Jan 13 07:54 AM Gary Lucido wrote:
> 1) No one has ever been able to explain how speculators can influence
> spot prices without taking delivery. The reason is that they can't.
> It's an absurd assertion.
> 2) References to the volume of futures trades as "evidence" that
> speculation is driving prices is equally stupid. For every buyer
> there is a seller. The volume of sells increased at the same rate
> as the volume of buys.
That was really weak argument on your part, and I am a bit surprised that so many share your sentiment but not surprised that not a one of you can or do deal with the facts as you make the case that speculation wasn't a key factor in oil going parabolic, and crashing. The facts are so clear that this shouldn't be a controversial issue. You do a serious dis-service to folks that don't know any better and come here to gain a little insight. Hopefully, people don't take your word for it (or mine for that matter) and go see the segment themselves. I just submitted an article meant to gently pants you and your friends and hopefully help to shed a ray of light on the truth. Somebody had to do it.
That was really weak argument on your part, and I am a bit surprised that so many share your sentiment but not surprised that not a one of you can or do deal with the facts as you make the case that speculation wasn't a key factor in oil going parabolic, and crashing. The facts are so clear that this shouldn't be a controversial issue. You do a serious dis-service to folks that don't know any better and come here to gain a little insight. Hopefully, people don't take your word for it (or mine for that matter) and go see the segment themselves. I just submitted an article meant to gently pants you and your friends and hopefully help to shed a ray of light on the truth. Somebody had to do it.
That was really weak argument on your part, and I am a bit surprised that so many share your sentiment but not surprised that not a one of you can or do deal with the facts as you make the case that speculation wasn't a key factor in oil going parabolic, and crashing. The facts are so clear that this shouldn't be a controversial issue. You do a serious dis-service to folks that don't know any better and come here to gain a little insight. Hopefully, people don't take your word for it (or mine for that matter) and go see the segment themselves. I just submitted an article meant to gently pants you and your friends and hopefully help to shed a ray of light on the truth. Somebody had to do it.
Bravo! Thanks for having the courage to address the trade issue. No one wants to touch that for fear of being called a commie but how free market capitalist is it to allow China to manipulate the terms of trade with their largest trading shill? And thanks as well for pounding away at the need for regulation of the shotgun welfare called TARP and TALF or whatever other acronym that might enable the kind of irresponsibility that makes us a second rate nation. The employment data is substantially worse than "official" statistics imply and about to get much worse. We clearly need thoughtful and effective policies to change many destructive incentive structures which kill jobs here - I hope we can muster the best of America's ideas on that front and implement those policies asap!
More dominos will certainly fall, only difference is that they will be smaller ones. So the Fed and Treasury have decided that there are many banks too big to fail because they recognize that the system is now extremely unstable – that doesn’t change the fact that these banks are not lending. The reasons are many, but the fact is credit is NOT easier to get. So it doesn’t really matter if you prop up the walking wounded, if they can’t do their jobs – i.e. facilitate business through lending and translate savings into investment and spending then okay, they are still alive but not doing what they should be doing to help our economic situation. Libor is down but there is no difference between getting denied a 7% mortgage and getting denied 5% mortgage. Sure, gas prices have fallen and that has helped – a substantial tax cut of sorts but where’s the stimulation? And a housing bill will help if done correctly but that I’m afraid will be too little too late.
So good luck buying more stocks. That might be good advice for the 2 or 3 guys left that haven’t taken a major beating; but for most everyone else, I think it’s too early given depression-like earnings collapse. And as for your stock picks, good luck to you on those as well – although all excellent companies, the earnings risk in RIG, CAT and even AAPL is (IMHO) much greater most suppose and the valuation multiples in the somewhat defensive RMD is hardly on the cheap side. I also think that RIG and CAT are value traps of sorts – both great companies and ones worth owning again some day but the earnings for RIG are going to be going down for a long time and the CAT earnings also at risk (and so too its balance sheet). The game has changed in way unimaginable, yet complacency abounds. The American economy is melting down and the banking system changed in ways that will stifle growth, (relatively speaking), for years to come. You might want to play a little more defense with your client’s hard earned money. A key lesson to be learned here is to worry more about what you might lose than what you might miss out on. Good night and good luck!
I think the ADP numbers are actually more accurate than they get credit for - they come from actual payroll stats that ADP has a large enough sample to extrapolate a more reasonable estimate than not suing the ADP data. I think the ADP data did well to inject a dose of reality to markets. No economic variable drives personal and collective economic pain or pleasure more than employment. What is happening economically, is a disaster - the U.S. economy is melting down and some have questioned if I'm getting overly emotional. BSC, LEH, AIG, FNM, FRE, IDE, WM, WB and C - (and many others) all effectively wiped out of equity and have much more than temporarily impaired the banking system such that many more otherwise viable businesses are going to go down. I'm afraid you aint seen nothing yet! To the extent that the pie keeps shrinking as consumers and businesses de-leverage, demand is likely to deteriorate and you will see excess capacity everywhere (globally). I doubt very much that businesses will hire people they don't need (or make substantial capital investments) even if they get hefty investment tax credits and other tax incentives. Things will get more pessimistic still, when people are unemployed for 6 or 9 months and cant find a job before the holidays. Make no mistake about, this is not your daddy's recession. The so called "pros" on cnbc wont so frank so take them with more than a grain of salt and never forget they are almost all long only fund managers who get compensated mostly on assets managed and will never tell you you're better off taking your money elsewhere.
On Jan 07 02:11 PM bricki wrote:
> While it is clearly a time to be careful, the recommendation cuts
> both ways - be conservative both on the up and the down side. The
> ADP results have triggered a lot of pessimism, but we have seen these
> numbers be off by a factor of 3 before.
Well put. I've been saying that for years - I think its criminal that management effectively steals huge amounts of equity form shareholders while institutional investors say nothing. Its outrageous IMO. and I don't doubt that lenders will try to grow credit again aggressive some day, but it wont be AS pathological and that credit will be priced to better reflect the risk so costlier credit will make many investment ventures mathematically impossible and thus it wont get done. Enough with the heads CEOs win and tails shareholders lose - Fuld is one guy who siphoned off hundreds of millions of dollars for running a company into the ground and he had the audacity to mention the other billion dollars of stock an options he had the directors he appointed take from shareholders and give to Fuld. Now $500M wouldn't save a company levered 30 to 1 in order to buy a trillion dollars worth of garbage assets, but if they were still only levered 12 to 1 it would be material b/c the assets would be a fraction of the 900B they carried which to bring it full circle they needed to carry in order to earn enough money that shareholders didn't notice how Fuld effectively embezzled so much of the shareholder equity apparently created by levering up as much as they did and valuing their assets however they wanted to.
On Jan 07 03:35 PM Malkiel wrote:
> If anything has been true for an entire generation, it's that the
> keepers of the cash--banks, credit cards, brokerages, mortgage companies,
> etc.--will find a way to introduce leverage back into the system.
> There's a system in place in which companies are run by the whim
> of ceo's who need to care only about the opinion of their lending
> banks and stock rating entities, making short-term numbers such as
> quarterly earnings more important than they should be and guaranteeing
> that the race to short-term gains will continue and that leverage
> will be the primary tool for getting there. Until reforms are put
> in place which demote ceo's back to employees and restore shareholders
> to their place at the table, the privileged insiders will continue
> to restructure the recovery to meet their needs first. Leverage
> will return, along with new bubbles and new artificial wealth. This
> may not be a bad thing if it's managed intelligently--but it must
> be managed, a totally hands-off approach won't do. In any event,
> all those people with seemingly wrecked credit from foreclosures
> and bankruptcies will be getting their credit card offers in the
> mail next year to start the karmic cycle all over again...
Thanks for the comment. I think part of the puzzle you identify (and I thought I knew currencies well but am as confused as you are) might be related to the dollar (whether you agree with it or not) still being the reserve currency world and perhaps also partially the result of confidence associated with the perception that U.S. fiscal and monetary authorities are moving quickly to address the issues aggressively while European officials are behind the eight ball and thus risking a more significant decline in growth and later recovery. You also have to consider that the market is probably being manipulated in a coordinated fashion – I would not be surprised if Paulson got the Chinese’s word that they would hold tight.
Its interesting to me that the Fed and Treasury aren’t more worried about a potential dollar crash given the circumstances. Finally, pegs and currency boards are out of the question – that would be tantamount to telling the Chinese and European Union that we give up so we’re handing in our keys to the global economic kingdom and taking our place aside the Greeks (no offense to the Greeks and the Romans). The real longer term threat in this regard is that the Euro takes big reserve currency market share and/or meaningful market share of the global petrodollar economy. If arab people keep getting pummeled, and/or the dollar and economy falter, I would not be surprised to see a lot more oil priced in euro and yen (if the Yuan ever becomes fully convertible, they’d take Yuan as well.
On your point about an whether the market (which is a collection of stocks) will be driven by economic activity and earnings or is an asset value/currency call: my point was the bulls started running despite the fact that no one seems to have an idea what earnings might be – earnings matter, if earnings on the S&P500 turn out to be $40/share in 2009, you can bet your bottom dollar that we’ll have a zero chance of hitting GS’s laughable 1200 target. If growth is slower in the next 25 years than it was in the last 25 years (very little doubt in my mind it will be), why should investors expect the S&P500 to sustain a high teen multiple?
Lastly, I like your thinking on when one might trade ever cheapening dollars for equities and other assets. However, I think the WY example is a special case in that other industries can’t sell assets like WY, because they need their assets to operate and generate the cash flow needed to remain a going concern. A lower dollar should aid all hard assets (including dirt), but if it happens in the context of our gigantic fiscal and monetary stimulus faltering, then WY shares are likely to be pressured because their earning power and asset values are declining. I doubt they will get credit if they are selling assts in a distressed fashion and I wonder where the buyers would come from if few have down payments or credit.
I said dirt that’s what they have dirt and trees. With opportunities in real estate selling below replacement costs, I don’t see builders rushing to buy WY’s land and build on it and hope the demand materializes. I think of it more as an asset allocation decision where yes, you do want to diversify out of dollars and dollar denominated debt, and especially treasuries b/c I think the Treasury and Fed won’t defend a declining dollar. But I don’t know if dirt is the way to go anytime soon if the dirt doesn’t generate income and its worth less in the near future. You might look at them as having a balance sheet issue similar to banks – liabilities are relatively sticky while asset values are plunging – if WY was more leveraged, equity would get obliterated if land prices further. I haven’t followed WY for a few years (very good company IMO, by the way) but a quick glance at the balance sheet lends comfort but I don’t know what their assets are valued at on those books – I would not be surprised if they would have to take charges and write offs if they sold land bought more recently at losses. I’ll want to own builders again for other reasons but not in a big way yet.
Thanks again for the comments; appreciate your insight.
On Jan 07 12:22 PM Crocodilian wrote:
> Here is the puzzle: We're having a deflationary crash, one which
> appears consistent with a hard money or currency board type system--
> and yet the floodgates on money are wide open.
> So while I don't disagree with your statement:
> "Today the big question revolves around how bad earnings will get
> and what the nature and timing of a recovery "
> that assumes that the market is going to be driven by economic activity.
> There's at least an arguing point while that is the case in "normal"
> times-- these are not normal times, and something else may be in
> store
> . . . to me, the "big question" is: "When does the weight of dollar
> creation hit the markets?" "Helicopter Ben" long ago pointed out
> that the Federal Reserve has a printing press. At some point, if
> you're holding cash or Treasuries, the mountains of supplemental
> dollars lead you to want to trade those dollars for assets . . .
> and equities have earnings, but they also have assets.
> Take a Weyerhauser, owning zillions of acres of timberland. They
> could be analyzed as a company exposed to construction-- in which
> case, earnings will be lousy, and performance will be lousy. Or they
> can be considered as an owner of land and timber. At what price and
> at what point do you say "I'd rather trade my dollars for an ownership
> stake in land and timber, because I think land and timber will be
> more valuable in dollars in the future?"
> That's not an earnings call, that's an asset value/currency value
> call.