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Mark Bern, CFA  

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  • Quickchat #279, March 19, 2015 [View instapost]
    WT - Agree with you assessments, but still think that tight oil plays like shale will be tapped in the future whenever the price gets much above $60. If the Saudis jack up the price by reducing production they will be cutting their own throats by pumping life back into the shale plays. I think the only areas where we may differ is where the price lid may be and how long it will remain intact.

    Eventually, all the low-cost tight oil will be tapped and the price can float higher, maybe to above $70, until the next layer of medium-cost fields are tapped, and so on. Getting back to $100/bbl oil could take a decade or two, imho. But oil companies can still be very profitable with oil above $70. And the supply/demand imbalance will get worked out at that level because it may keep some of the more expensive, major deep-water plays on hold. Thus, I believe, in the absence of major geopolitical disruptions in supply, oil prices should settle into a relatively narrow range (may $30 range; $35-$65 or $40-$70) for a decade or longer.

    I could be wrong, but that is what I am thinking currently. If the dynamics change or become clearer and I see something different, I won't hesitate to recant and restate my new view. This is just where I am at the moment.
    Mar 23, 2015. 01:04 PM | 3 Likes Like |Link to Comment
  • Quickchat #279, March 19, 2015 [View instapost]
    I have to agree with Freya on the end of the super cycle for commodities. I believe we are now on our way down for most, if not all, commodities for two reasons (not unlike the past). When prices got so high it was because demand was outpacing supply. So what did suppliers do? The expanded capacity. It happened in oil, copper, iron ore, nat gas...

    Now, as the global economy growth is slowing we have a glut of supply in several commodities already and, in some cases, more production soon to come on line.

    As far as oil is concerned, I suspect many of the small, over-leveraged players will go bankrupt and good assets will be bought up on the cheap by the bigger, better capitalized competitors. That could reduce the average cost for developed properties. Also, I expect that the lower cost fields will continue to be developed to the extent that future production can be hedged by forward selling contracts. That could tend to put a lid on oil prices for awhile. We may not see the WTI price much over $65 until those areas are played out.

    Then, the technology will be exported to develop other shale oil fields with similar cost attributes. How long will it take for sustained oil prices back over $80? I think we can measure that in years. But then, there will again come an end to the cheaper oil and demand isn't going down, so once the demand/supply lines cross again it may be more permanent. I only hope to around long enough to profit from that eventual move.

    disclaimer: Just my opinion; no claims on accuracy.
    Mar 22, 2015. 08:14 PM | 3 Likes Like |Link to Comment
  • Quickchat #279, March 19, 2015 [View instapost]
    Just looked up earning estimates for Q1 2015 on factset. http://bit.ly/1xLMtee

    On Dec. 31, 2014 the consensus for estimate for S&P 500 was a y/o/y increase of 4% (largest drop since Q3 2009). As of yesterday, revised guidance has pushed that estimate down to negative 4.8%. Most of the drop was attributed to two factors: falling earnings in energy sector and losses from foreign sales sales due to US$ strength and currency translations.

    As consensus moves downward, though, it will be easier for companies to "beat" expected earnings which, even with earnings falling compared to a year ago, will be spun by the media as another quarter of good results.

    The problem is that profit margins and earnings also peak in a cyclical fashion and, in the past, when both of those measure have peaked the market usually follows. Companies see earnings fall and make cuts (usually in employment and capital spending) and economic activity contracts producing a recession. It is a sort of self-fulfilling prophecy: as companies see things getting worse they adjust spending in preparation and become the cause what they expect.
    Mar 21, 2015. 02:49 PM | 4 Likes Like |Link to Comment
  • Quickchat #279, March 19, 2015 [View instapost]
    I recently read that normalized short-term interest rates in the US would be about 3.05% if the Fed ZIRP policy was not in effect. This is calculated by adding a "normal" spread of 1.5-2.0% to the expected inflation rate (the current mid-point of the recent Fed projection is 1.3%). Or as an equation from textbook; nominal = inflation premium + real. The discount rate in this equation would be "nominal."

    I know I have seen 1.75-2% stated in a newsletter (not on Internet) as the "real" rate or average spread. I also found a court case (in Ontario) that ruled that a rate of 1.5% must be added to the expected inflation rate to be used as the assumed nominal rate for awards and 2.5% spread for longer-term awards.

    If we use the mid-point for 1.5-2.0%, or 1.75%, and add it to the mid-point of current Fed projection of 1.0-1.6% for inflation in 2015, or 1.3%, we get 3.05% as what would be a "normalized" short-term rate, or discount rate.

    Using the normalized short-term rate compared with the 10-yr T Bond rate or 1.93% we see that the yield curve may already be inverted. But, of course, it's been this way for years now and no one has mentioned it, so, therefore, there is no reason to worry about it being an indicator.

    My point is that and inverted yield curve has always predicted every bear market, to my recollection, and when the Fed allow short-term rates to rise to "normal" levels, unless long-term rates rise (which may or may not happen), we could experience an inverted yield curve. If that happens, everyone will see the problem and declare the bull dead at the same time simultaneously rushing for the exits.

    Okay, I know I am being a bit over-reactionary here, but I suspect that the markets are reacting a bit the same way at the hint of higher short-term rates. Long rates seem to be heading lower and if short rates begin to rise it won't take long before the two meet and voila!!!! inversion!

    Crazy, I know!
    Mar 21, 2015. 02:37 PM | 4 Likes Like |Link to Comment
  • Quickchat #279, March 19, 2015 [View instapost]
    I listed my pitchfork on Craig's list today and am looking for top-of-the-line hedge clippers!

    I think the pitchforks would look scarier from the upstairs mansion windows, though. But I do agree that something has to give. The 99% is not going to take it much longer. The 3 historical options aren't on my bucket list either.
    Mar 20, 2015. 11:42 AM | 3 Likes Like |Link to Comment
  • The Time To Hedge Is Now! March 2015 Update [View article]
    kg2931 - Thanks for commenting but please enlighten us as to how MU has changed so much that it will not react as it has in the past. I really would like to understand the basis for your statement. We all need to keep an open mind and I am always open to new perspectives.
    Mar 19, 2015. 05:46 PM | Likes Like |Link to Comment
  • QuickChat #278, February 5, 2015 [View instapost]
    jpau - Thanks for the link - enjoyed it much. But I do wish he had gone a little faster. That 10 sec breather was not necessary. Just kidding! LOL

    Not sure I agree completely on Google but definitely do on the others. But he does more research so it gives me something to think about.
    Mar 19, 2015. 01:08 PM | 2 Likes Like |Link to Comment
  • QuickChat #278, February 5, 2015 [View instapost]
    I saw someone saying that we are weeks away from oil storage capacity and the bottom falling out in oil prices. These guys are predicting $20/bbl oil! I guess I'll hang onto my USO puts. Happy days!
    Mar 19, 2015. 12:29 PM | 3 Likes Like |Link to Comment
  • QuickChat #278, February 5, 2015 [View instapost]
    I checked the overnight action and decided to stick with my position, too. Glad I did. Reminds me of a good day on the rides at Busch Gardens! Exhilarating!
    Mar 19, 2015. 12:27 PM | 3 Likes Like |Link to Comment
  • QuickChat #278, February 5, 2015 [View instapost]
    Agree, Maya. I timed it and it took me 21 secs to load the page. Of course, we are getting close to 1,000 comments. Maybe that's worth waiting for?!
    Mar 19, 2015. 12:32 AM | 3 Likes Like |Link to Comment
  • QuickChat #278, February 5, 2015 [View instapost]
    I only wish I had been so smart as WT. Still holding my position in EUO with a decent gain but will think about it overnight.
    Mar 18, 2015. 05:16 PM | 4 Likes Like |Link to Comment
  • QuickChat #278, February 5, 2015 [View instapost]
    Either there were no protesters injured or the media decided not to mention it. Lots of police injured is newsworthy. A lack of injuries to protesters is supposed to show us how a "civilized" country handles protesters? Something seems amiss to me.
    Mar 18, 2015. 01:44 PM | 4 Likes Like |Link to Comment
  • The Time To Hedge Is Now! March 2015 Update [View article]
    metal27 - You are right, of course. I said the inverse of what I was thinking. As the US$ rises against other currencies it just makes oil more expensive for those nations whose currency is weaker. A rising US$ is one of the factors keeping oil prices from falling further. If the US$ takes a breather I suspect oil prices will fall again.
    Mar 18, 2015. 01:31 PM | Likes Like |Link to Comment
  • QuickChat #278, February 5, 2015 [View instapost]
    I second the request for a new QC if it isn't too much trouble. It is even taking my computer quite a long time to load now. I've never experienced this before.
    Mar 18, 2015. 12:20 PM | 4 Likes Like |Link to Comment
  • The Time To Hedge Is Now! March 2015 Update [View article]
    metal27 - I am now focusing some research on three royalty trusts that produce primarily nat gas. I will eventually write an article about these (or at least my favorite) when I think most of the damage is done. My reasoning is that while the build of oil in storage continues it seems too soon to expect much positive price action in that area. With the first LNG exporting terminal coming on line later this year and two more between now and mid 2017 I believe that I can see the light at the end of the tunnel on nat gas prices. The bottom may already be in or we are getting very close. The exports should soak up much of the excess nat gas supplies and we should see nat gas prices in the US rise. Even though the mid-streams don't get hit as badly because revenues are not tied to prices, as part of the energy sector, they are still getting hit. I would argue that most of the downside in midstreams, including KMI, is being overdone and nothing to worry about in the longer term. Volumes will dip somewhat in a recession but the basic necessity of electricity and transportation will keep the midstreams from staying down.

    I don't feel the need to treat those positions differently since if a recession hits the Fed will undoubtedly come to the rescue with low interest rates (if it has the chance to raise them much first) and then investors will be looking for stable income plays. One of the first to emerge will be the midstream companies with long-term contracts and relatively fat dividends with ample cash flow. I expect them to be one of the first to bounce back. If we get much lower I'll be backing up the truck to load up.

    The bottom in oil prices is a little trickier to predict. The currency wars aren't helping either. As the US$ rises, of course, Oil (which is priced in US$) rises along with it. As the storage fills up here and abroad (which should happen by June at the latest at the current rate) the price of oil could drop even more. Frackers aren't going to start many new drilling projects except in the lowest cost plays, but they also won't halt projects already started. Those projects have been hedged (at least many have) out for two years on average at prices that should keep them from going under. All of the smaller E&P companies that don't hedge and are up to their eyeballs in debt will fold, but some other larger concerns will come in and buy up the assets for pennies on the dollar and keep the oil flowing. So, the drop in production will come in the shale plays, but it will be gradual rather than steep, imho. So, the problem of oversupply doesn't go away.

    Also, a deal with Iran could add another 1 mm bbl/d to supply in a matter of months. Thus, the oil price could stay down for a while. But as long as the oil flows through the pipes the midstream companies will do better than other parts of the energy sector. All that is to say that I do realize that the midstream companies could get hit some more, but I don't see how to predict by how much and don't expect it to last very long. All the while the dividends should be covered well so holding seems like the best thing to do. Hedging something that really hasn't lost its true value doesn't seem to me to be a good thing to do unless you buy puts on the weakest companies in the sector. I suppose it would make sense then to buy puts on the E&P companies with the highest debt-to-equity ratios and worst cash flows because those stocks will do much worse that the midstream stocks.

    I hope that helps. And thanks for making think my way through a response. Good question.
    Mar 18, 2015. 12:19 PM | Likes Like |Link to Comment
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