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    • Oil Bubble? Nope [view article]
      Tough to argue with Goldman Sachs? Just look back to 1999-2000 as they were touting technology stocks. Touting anything when it is trading on momentum and sentiment is irresponsible and leads to speculation and bubbles.

      Since 2003, the number of open futures contracts has shot up over 200%, and the daily number of contracts traded is up over 300%. Prior to this big jump in oil futures contracts and trading, there was a 75% correlation of the year over year price change in oil to the year over year change in oil inventories (higher inventory, lower price, and vice versa). Now, that correlation has fallen to ZERO. When the price of anything disconnects from fundamentals and trades on momentum and sentiment, you can be assured it is speculation that pushes the price into bubble territory.

      ICE's power outage last week demonstrated this. While their electronic exchange was down, the price of oil started to collapse on other exchanges. Then as soon as ICE was back on line, oil pared its losses to close flat for the day.

      $120 oil is unsustainable for any extended period of time, because anywhere above $80 gives the US the largest oil reserves in the world in the oil shale wastelands of Utah, Wyoming, and Colorado.
      May 18 08:56 AM
    • Searching Oil Inventories for a Bubble [view article]
      How about the supply/demand and inventory of oil futures contracts? Since 2003, the number of open futures contracts has shot up over 200%, and the daily number of contracts traded is up over 300%.

      The truth of the matter is that prior to this big jump in oil futures contracts and trading, there was a 75% correlation of the year over year price change in oil to the year over year change in oil inventories (higher inventory, lower price, and vice versa). Now, that correlation has fallen to ZERO. When the price of anything disconnects from fundamentals and trades on momentum and sentiment, you can be assured it is speculation that pushes the price into bubble territory.

      ICE's power outage last week demonstrated this. While their electronic exchange was down, the price of oil started to collapse on other exchanges. Then as soon as ICE was back on line, oil pared its losses to close flat for the day.

      $120 oil is unsustainable for any extended period of time, because anywhere above $80 gives the US the largest oil reserves in the world in the oil shale wastelands of Utah, Wyoming, and Colorado.       May 18 08:47 AM
    • IMF: Speculation Playing 'Significant Role' in Oil Price Surge [view article]
      Today, we had the best evidence ever that the price of oil is being driven by rampant speculation. The power goes out on ICE, shutting down their electronic trading in oil futures and the price of oil on other exchanges collapses. Then the power is restored on ICE and oil instantly pares its losses. May 15 02:59 PM
    • IMF: Speculation Playing 'Significant Role' in Oil Price Surge [view article]
      Actually, you don't need to burn any natural gas. Nuclear power can generate all the steam necessary at much higher thermal efficiencies than can be achieved from natural gas, and it can simultaneously provide abundant electricity.

      Yes, the refining of shale oil will be different from WTI, but that is already factored into the estimates that initial extraction from shale is competitive at $80, with efficiencies improving the cost position with time and experience.       May 15 10:22 AM
    • IMF: Speculation Playing 'Significant Role' in Oil Price Surge [view article]
      Since 2003, the number of futures opened in oil is over 200% higher. The number of futures traded is up almost 300%. Prior to 2003, the year over year price change in oil was 75% inversely correlated to the year over year change in inventories (lower inventory, higher price and vice versa). Since 2003, that correlation has gone to ZERO. When price becomes more correlated to number of open contracts and number of contracts traded instead of the physical inventories, it is known as speculation.

      Peak oil is a crock. At $120/barrel, the US has more oil reserves than the entire middle east in the wastelands of Colorado, Wyoming, and Utah in what is known as oil shale, with reserves estimated to be around 2 TRILLION barrels. Initial production of oil from shale is profitable at $80, which would only decrease as extraction methods are tweaked and refined as has happened in the Canadian tar sands.       May 15 09:16 AM
    • What Is Citi Stock Worth? [view article]
      To nonsumdignus:

      Pretty much all C has left in terms of subprime exposure is in the highest tranches, and most of those are in the older vintages which have superior credit metrics and default performance. That is why as risk appetite is returning to the market these tranches are going up in value. The highest tranches need a foreclosure rate of 40% and a severity rate (loss on sale in foreclosure) of 50% before their values are significantly impaired. None of the older vintages are coming anywhere close to these numbers, so they are returning to par.

      Leveraged loans are also returning to par, which means C is more likely to have to mark up rather than mark down in the coming months.

      I would be cautious on the short side here because the macro story on C has already played itself out. As risk appetite returns to the market, C will no longer be a momentum/sentiment trade and will return to a fundamental valuation. Since the last recession, C has traded within 2-3% of 2x end of year book value.

      Year Avg. Stock Price 2x End of Year Book
      2007 $46 $43(diluted)
      2006 $47 $48
      2005 $43 $43
      2004 $42 $42
      2003 $36 $37
      2002 $32 $33

      Bloomberg estimates show a forecast end of 2008 book value of $23. Going from 1x P/B to 2x P/B gives significant potential return.       Apr 21 07:18 PM
    • What Is Citi Stock Worth? [view article]
      C will be writing up the value of the assets that it just finished writing down. Check out the ABX index for subprime and LCDX index for leveraged loans. Both are up in value since C closed the books on March 31.

      People fear C won't be able to return to its peak earnings power, but a company that has a long history of high teens/low twenties returns on equity will inevitably get back to those levels of profitability. It won't happen immediately, but within a couple of years, the RoE will be 18-20%.

      Companies with that level of profitability will trade at 2x book value, just as C has historically. With $21 of book value currently, $42 is a good one year price target. Within 2-3 years, C will be at $50.       Apr 21 02:07 PM
    • Citigroup Break-Up Analysis - Part II [view article]
      Valuing Citi at a 10x P/E on trough earnings is--to put it politely yet emphatically--absurd.

      Historically, Citi trades at 2x the end of year book value, something that is easily verifiable. This is completely appropriate for a company that earns a high teens/low 20s return on equity.

      Backing in to what the market is currently saying about the end of year book value will be, we get $62.5B. Make whatever further writedown assumptions you want, but Citi's shareholder equity at the end of the year is not going to be anywhere close to that low, especially when you consider net income in a normal year can hit $20B.

      Consensus book value per share for the end of the year is $25-$26 (assuming some pretty dire write-downs) implying that Citi will be a $50 stock within a year.

      If you have an investing time horizon longer than the lifetime of a fruit fly (meaning you're not at a hedge fund), stop worrying about how low it could trade from here and take the plunge. If it does go down, buy more.

      Do the same kind of analysis on AIG, and you'll come out even further ahead because AIG's risk controls far exceed Citi's.
      Feb 21 01:13 PM
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