Posts Tagged ‘oil’
Tuesday, March 9th, 2010
This article is a guest contribution from John Thomas, madhedgefundtrader.biz, via ZeroHedge.com
Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, “what to do about Japan?” was the topic of the day, and I was bullish.
Today, Barton can say with “real certainty” that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years.
Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF). The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all.
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The grizzled old Wall Street Veteran sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a “new normal” of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation.
Looking at the world as a whole, Barton thinks Asia is the place to be. A mammoth bubble may be developing in China (FXI), but it is at least 3-5 years off, and there will be plenty of money to be made until then. India (PIN) is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea (EWY), Thailand (THD), Taiwan (EWT), H-shares in Hong Kong (EWH), and Turkey (TUR) are also lining up in Barton’s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland (PLND) and Russia (RSX). Traxis is short Brazil (EWZ), because it has already had a great run, and because the country still faces some severe social problems.
Commodities had their run last year, and won’t do much from here, but they aren’t going to crash either. He sees oil (USO) grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds (TBF) will be deflation driven for the next year, but are definitely not for your “Rip Van Winkle” investor, as they represent poor value for money. Real estate is dead money. To hear my interview with Barton at length on Hedge Fund Radio, please click at http://www.madhedgefundtrader.biz/Barton_Biggs.html
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily.
Source: Zerohedge.com, March 9, 2010.
Tags: Barton Biggs, Cap Technology, Caterpillar Cat, China, Cisco Csco, Commodities, Downshifting, Emerging Markets, ETF, Free Cash Flow, GDP Growth, Gravel Voice, India, Intc, Intensive Research, Investment Landscape, Last Decade, Market Exposure, Msft, oil, Oracle Orcl, Price Earnings, Sophisticated Models, Street Veteran, Technology Stocks, Traxis Partners
Posted in Emerging Markets, India, Markets | No Comments »
Sunday, February 28th, 2010
Energy and Natural Resources Market
Strengths
- The Baker Hughes weekly rig count climbed by 28 rigs in the United States to a 52-week high of 1,373 drilling rigs.
- U.S. crude steel output totalled 1.66 million short tons last week, up 0.9 percent, with mills operating at an average capability utilization rate of 68.6 percent. This was the highest weekly total since late-October 2008.
- Global steel production increased by 2.1 percent on a sequential basis to 109.2 million metric tons for the month of January or the equivalent of 1.286 billion metric tons annualized. This is compared with 107.0 million metric tons during the month of December or 1.259 billion metric tons on an annualized basis.
Weaknesses
- A key leading indicator of non-residential construction in the domestic market, the American Institute of Architects (AIA) Billings Index declined to a reading of 42.5 for January from 45.4 in December.
Opportunities
- Bloomberg news reported Indian Finance Minister Pranab Mukherjee said that the country will spend about $1.1 billion on expanding electricity capacity in the year ending March 2011. It also plans to introduce a coal regulatory authority. Over 75 percent of the country’s electricity is powered by coal.
- China Industry news reported that China will likely add another 85 gigawatts of installed power generation this year to bring the country’s total to about 950 gigawatts by year-end.
Threats
- South African state-owned power generator Eskom has been granted permission to annually raise electricity prices by 25 percent over a three-year period, following protracted negotiations.
Tags: American Institute Of Architects, Baker Hughes, Billion Metric Tons, Capability Utilization Rate, China Industry, Commodities, Crude Steel, Drilling Rigs, Electricity Prices, Eskom, Gigawatts, Global Steel, Indian Finance Minister, Institute Of Architects, Leading Indicator, Market Strengths, Million Metric Tons, oil, Pranab Mukherjee, Rig Count, Sequential Basis, Steel Output
Posted in Markets | No Comments »
Thursday, February 25th, 2010
This article is a guest contribution by TraderMark, of Fund My Mutual Fund Blog.
A few weeks ago we noted the world’s largest coal producer, Coal India, was on the hunt for global assets to expand their reach. [Feb 12, 2010: WSJ - World's Largest Coal Producer Has $6 Billion in the Bank and is on the Prowl for Assets] It appears this is now part of a broader national strategy mimicking what China has been doing the past half decade+.
If you have any Malthusian bones in your body, [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] [Jun 20, 2008: World Population to Hit 7 Billion by 2012] you have to wonder as certain countries waste all their national treasure on bailing out banks, financing the lifestyles of those who refuse to save for themselves, and funding pet projects of their politicians - while others are attempting to snatch up as many long lived assets across the globe, what the long term implications will be. This is more or less parallel to a company who lives for today - happy to kick the can down the road - rather than spends heavily on R&D to prosper for tomorrow. Of course any such national directives would be considered “socialistic” in certain countries, hence anathema to even consider as national policy. Oh well, much better to send countless paper monies out into the atmosphere to help prop up home prices and capital market values from going where they belong - a much sounder national directive.
Via WSJ:
- India wants to join the club of global energy giants. Some of the country’s largest private and state-run firms are in hot pursuit of oil and gas assets overseas as they seek to take advantage of depressed asset prices during the downturn and break free of burdensome regulations at home.
- In the latest move, oil-to-textiles conglomerate Reliance Industries Ltd., run by billionaire Mukesh Ambani, raised its bid over the weekend for LyondellBasell Industries, a bankrupt petrochemical maker and oil refiner. The new bid values the Netherlands-based firm at $14.5 billion, according to a person familiar with the matter. A deal with Lyondell would significantly advance the ambitions of Reliance’s Mr. Ambani to build a global energy conglomerate. It would create a behemoth with $80 billion in combined revenues and interests in oil-and-gas exploration, refining and petrochemicals used for food packaging to textiles. (Reliance is akin to a combination of General Electric and Exxon Mobil in the States - a powerhouse in India with hands in countless industries)
- Reliance, India’s largest private company by market value, already operates the largest oil refining complex in the world, a site in the western state of Gujarat that can process 1.24 million barrels of crude a day. The facility is designed to handle the kind of ultra-heavy crude that could be extracted from Value Creation’s oil sands.
- Reliance also is scouting other foreign targets, including Canada’s Value Creation Inc., which has large oil-sands deposits in Alberta, people familiar with the company’s thinking said. (China has also been in Canada purchasing oil sand deposits) Smaller rival Essar Group is stepping up its own bargain hunting abroad, with an eye on assets that Royal Dutch Shell PLC and other oil majors are unloading.
- In recent months, Reliance and Essar, both based in Mumbai, have hired top executives from global oil majors to aid their international expansion efforts.
- Meanwhile, India’s flagship state-run oil company, Oil & Natural Gas Corp., said recently it may spend as much as $30 billion over the next decade on an international acquisition binge.
- Indian companies are scouring the globe to secure crude resources and reduce their dependence on imported oil. India imports 70% of its oil, with a price tag of more than $90 billion annually. The companies are also looking to expand their global footprint with refineries and other assets in far-away markets. And they want relief from the regulatory headaches of their home turf, where government influence in exploration and pricing of natural resources has slowed expansion.
- India is likely to face competition as it shops for oil and gas, especially from Chinese firms. Last summer, Sinopec Group, a large Chinese oil company, paid $7.2 billion for Addax Petroleum, a Geneva-based company that has oil and gas assets in the Middle East and Africa. “We see the international players being more often the buyers of these types of assets now, and there’s no reason to think that won’t continue,” said Jon McCarter, oil-and-gas transactions leader for the Americas at Ernst & Young.
- Cross-border acquisitions by Indian companies fell 37% last year to $11.4 billion, according to Dealogic. But activity is picking up as Indian companies rev up for big-ticket deals in sectors such as energy, telecommunications and media.
- The country’s largest cellphone company, Bharti Airtel Ltd., offered $10.7 billion last week for most of the Africa assets of Kuwaiti operator Mobile Telecommunications Co., known as Zain. Essar Group, a conglomerate with $15 billion in revenue and interests in steel, oil and telecom, controls oil exploration blocks in places including Nigeria, Madagascar, Myanmar and Vietnam. Now the company has emerged as an eager buyer for European and U.S. oil companies that are struggling with extra refinery capacity due to slumping demand for fuels.
You can almost feel the sands shifting under our feet, month by month - year by year.
Source: TraderMark, fundmymutualfund.com
Tags: Asset Prices, Burdensome Regulations, China, Coal India, Coal Producer, Commodities, energy, Energy Giants, Gas Assets, Global Assets, Global Energy, Global Hunt, Hot Pursuit, India, Long Lived Assets, Market Values, National Strategy, oil, Paper Monies, Pet Projects, Reliance Industries, Reliance Industries Ltd, Term Implications, World Population, Wsj
Posted in Emerging Markets, India, Markets | No Comments »
Saturday, February 20th, 2010
By Frank Holmes
CEO and Chief Investment Officer
We are entering a time of year that in recent decades has been good for energy prices and energy equities.
Combine that with new estimates that domestic and global energy demand will rise in 2010, and we have the makings of a promising period for investors.
March tends to be one of the best months of the year for both crude oil and natural gas.
As you can see on the charts below, which cover roughly the past 20 years, the price of oil at the end of March is on average nearly 4 percent higher than the closing price in February. For natural gas, the increase is even more eye-catching – gas on average climbs more than 7 percent in March.
The main reason for the oil price rise in March relates to the demand pull created by
refiners ramping up in advance of the summer driving season. Crude price increases fall off through the early summer before picking up again in the late summer. From September to October, there is typically a big price drop that continues through year-end.
For the refiners, March marks the end of a five-month stretch in which monthly crack spreads (value of refined products minus the price of the crude oil feedstock) tends to increase. If next month follows the pattern, spreads would be 4 percent wider than February. So far in 2010, however, the results have lagged the longer term trend – January saw spreads narrow by about 3.5 percent and for February to date, spreads are up about 2 percent.
For natural gas, which is always extremely volatile, March is a strong month in large part due to late winter snowstorms that move across the country. When you couple that weather variable with the fact that inventory levels for natural gas have usually been drawn down substantially during the winter heating season, the result can be some dramatic spikes for gas.
A cold January lifted spot natural gas prices about 6 percent higher than the December forecast, and in early February gas for April delivery was on average trading 16 percent higher than the same period in 2009.
For energy equities, the typical rally period is February through May. So far, 2010 is not straying too far from that long-term trend: from a peak of 1,122 in early January, the Amex Oil Index (XOI) fell 12 percent by February 9 before heading back up 5 percent over the next six trading sessions.
Of course, seasonality is not a perfect barometer because each year brings its own distinct market conditions. In 2010, the extent of global economic recovery will be a factor, as will economic growth rates in the large emerging nations.
In the U.S., petroleum consumption fell by 820,000 barrels per day (4 percent) last year. Federal officials predict daily oil demand will increase about 1 percent this year, while natural gas demand is expected to increase nearly a half-percent. Gasoline prices may top $3 per gallon this spring, according to the federal outlook.
In its latest monthly report, the International Energy Agency raised its forecast for global oil demand growth to about 1.6 million barrels per day this year, with all of that incremental demand coming from the emerging markets.
China accounts for a quarter of the new global demand for oil. That incremental growth could be revised upward again if it looks like global GDP growth – led by the large emerging economies – will be stronger than the anticipated 4 percent. And if the supply response to additional demand is weak, higher oil prices could result.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The AMEX Oil Index (XOI) is a price weighted index designed to measure the performance of the oil industry through changes in the prices of a cross section of widely-held corporations involved in the exploration, production, and development of petroleum.
Tags: Chief Investment Officer, China, Crude Oil, Crude Price, Emerging Markets, energy, Energy Prices, Feedstock, Frank Holmes, Global Energy Demand, Inventory Levels, Months Of The Year, Natural Gas Prices, oil, Oil Price Rise, Price Increases, Price Of Oil, Refined Products, Refiners, Spikes, Term Trend, Time Of Year, Winter Heating, Year End
Posted in Markets | No Comments »
Monday, February 15th, 2010
Energy and Natural Resources Market
Inflows into commodity index tracking funds were strong in January after some slippage in December. This suggests that appetite for commodities exposure did not evaporate in January despite volatile markets.
Strengths
- In the U.S., domestic steel capacity utilization increased to 67.3 percent for the week ending February 6, from 66.9 percent in the prior week and production increased 63 bps to 1.6 million net tons.
- In its January market report, the International Energy Agency increased its estimate for world crude oil demand in 2010 by 170,000 barrels a day to 86.5 million barrels a day. This implies a gain of 1.6 million barrels a day, or 1.8 percent, from 2009 levels, and is driven entirely by emerging and developing economies.
- China’s coal imports more than tripled in 2009 to 130 million tonnes from a year earlier.
- Chinese auto sales were more than double last year’s levels, with total sales surging to a monthly record of 1.66m units in January.
- Iron ore shipments from Australia’s Port Hedland, the world’s largest bulk exporting port, rose to 15 million metric tons in January from 14.9 million tons in December.
- China’s electricity demand in January was 40.1 percent higher year-over-year and up 2.7 percent from December, according to the National Energy Administration.
Weaknesses
- China’s imports of iron ore fell 25 percent in January to the second lowest in a year on record prices.
Opportunities
- The European Union appears to have reached a tentative agreement to aid Greece with its debt overhang. The announcement of this tentative agreement appears to be stabilizing the Euro against the U.S. dollar.
- Vale SA, the world’s biggest iron-ore producer, said it will “struggle” to meet demand for the steelmaking raw material this year as China’s economy expands.
- Anglo American Plc expects coking coal contract prices to rise after weeks of heavy rain in Queensland state cut output by as much as 10 million metric tons, the Australian newspaper reported.
- The China Electricity Council (CEC) said that it expects power generation and consumption will remain at a very high level in the first half of 2010 and it is difficult to change the tight coal supply situation in the short term. China’s coal for power generation was 1.4 billion tons in 2009. According to market observers if the electricity consumption rose by 9 percent, the coal consumption would reach around 1.66bln tons, up 6 percent over 2009.
- Korean steelmaker Posco said that, considering the economic recovery, it may increase throughput by 22 percent this year and stainless steel production may rise to 1.80 million tonnes from 1.47 million tonnes last year.
Threats
- OPEC compliance with oil production quotas slipped to 53 percent in January, down from 56 percent in December, led by Angola and Venezuela.
- The Central Bank of China raised the bank reserve requirement ratio another 50 basis points this week marking the second increase this year.
Tags: Anglo American Plc, Capacity Utilization, Coal Imports, Commodities, Commodity Index, Contract Prices, Debt Overhang, Developing Economies, Domestic Steel, Electricity Demand, Emerging Markets, energy, Energy Administration, Heavy Rain, International Energy Agency, Iron Ore Producer, Million Metric Tons, oil, Oil Demand, Port Hedland, Queensland State, Steelmaking, Volatile Markets, Week Ending February
Posted in Markets | No Comments »
Monday, February 15th, 2010
By Dian L. Chu, Economic Forecasts & Opinions
Commodities, particularly crude, were trending down last week after China’s Central Bank raised bank reserve requirements boosting the US dollar against other major currencies. That marks the second time China has raised its bank reserve requirement in a month.
Ongoing worries about the economy stemming from European debt problems, specifically the lack of a firm Greek bailout plan from European leaders also prompted investors moving out of risky assets. Crude oil fell for the first day in five to below $75 a barrel also partly due to government data showing U.S. inventories rose more than forecast.
Meanwhile U.S. natural gas registered the largest one-day gain last Friday to $5.48 per mmbtu since the beginning of the month on a drop in jobless claims, signaling industrial demand is likely improving, and cold temperatures across the US are boosting residential demand. Industrial Demand accounts for 29% of U.S. consumption.
Oil Services Sector Bottoming Out
While the markets are in a finicky mood from the China and Greek factors, the return of relative stability in oil and natural gas prices has spurred producers to increase their capital budget and restart projects they slowed down or completely deferred a year ago. (Fig. 1)
Absorbing the impact of lower rig counts, weak global demand for fossil fuel and volatile energy prices, the majority of the oil services companies are reporting sharply lower earnings in Q1. However, the rising rig count and producers’ capital budget suggest that oil service markets are probably in the process of bottoming this year, which suggests a good entry point for long-term investors. (Fig. 2)
Oil Majors Go Deepwater & Subsea
Roughly from 2004 to 2008, the onshore, North America in particular, had outshined the offshore in terms of activity growth. But the Great Recession has shifted the tide towards offshore and international. Offshore is one of the few remaining places where the state as well as western oil majors can increase production, while emerging Asian demand is expected to outpace the U.S. and the OECD in coming years.
FBR estimates an increase in deepwater spending of almost triple expected growth in onshore spending will drive offshore spending overall at a rate of around 15% for the next few years. Energy consultants Douglas-Westwood also forecast offshore spending recovering to $439 billion in 2010, up 11% from 2009 with deepwater capital expenditure reaching new highs. (Fig. 3) South America, Mexico, Iraq, Russia, Africa, and the deepwater are the key areas.
Subsea has proven to be considerably more resilient in the downturn, and the secular growth story will continue to improve as the deepwater rig count is expected to increase by 30% in 2012 from 2009 and as projects get more complex and require greater amounts of equipment.
Offshore Infrastructure – The Buffett Way
Warren Buffett made headline last year when he placed the biggest bet of his life with the $34 billion purchase of Burlington North Santa Fe, expecting the infrastructure play will grow as the economy gets back on solid ground.
So, if we apply the same investment strategy as Buffett to the oil services sector, offshore infrastructure will be the logical choice.
Americans vs. Europeans
While oil companies typically fund and own the pipeline, platform, etc, they rely on oil services companies to provide project expertise and resources.
The oil services universe is made up of mainly two camps: Americans and Europeans. American firms such as Halliburton (HAL), Baker Hughes (BHI) and Weatherford (WFT) tend to have a stronger focus on drilling and production services mainly due to the existence of a vast American market, and higher margins.
The European firms, on the other hand, have essentially positioned as specialists in offshore drilling, infrastructure engineering and construction related services.
From Europe with Backlog
Therefore, the current offshore and deepwater trend bodes well for the major European service companies such as Saipem SpA and Technip SA (TKP). Theses two companies are leaders of the European pack dominating in high-tech segments for deepwater activities such as the installation of platforms, the laying of subsea pipelines, the development of subsea fields, etc.,
The oil infrastructure business is generally later cycle and backlog driven, and thus tends to have less volatility in earnings than other energy stocks. That means even if we go into a double dip, these stocks should still be able to generate higher earnings.
Favorable Forex Trend
Dollar appreciation is also a major catalyst. Société Générale estimated that a 10% increase in the dollar translates into an 8% to 10% increase in EBIT for the oil services sector. All oil services companies should benefit but those that combine a sizeable proportion of dollar-based assets with borrowing denominated essentially in euros, for instance, Saipem and Technip (TKP), stand to benefit most.
Furthermore, with euro recently plunging to a near nine-month low amid Greek concerns, the downward momentum is favorable for U.S. investors wishing to add positions in some solid European companies with good long term prospects.
Americans with Niche
All is not lost with the American companies. Large manufacturers of capital equipment such as Cameron (CAM) are poised to benefit as well, since the tender activity for deepwater rigs, subsea equipment, surface, valves and compression will likely accelerate in 2010 with oil companies gaining confidence in the commodity recovery.
Drillers & Seismic – Grinding Ahead
Nevertheless, all services are not created equal. Average day rates for deepwater floating rigs have fallen from up to $550,000 to $350,000. So, the next two years are going to be a grinding period for drillers like Transocean (RIG) and Diamond Offshore (DO) when they have to roll over old contracts at lower rates.
Meanwhile, seismic companies such as CGG Veritas (CGV) and Petroleum Geo-Services (PGS) are still struggling to find a bottom mainly due to vessel overcapacity on the marine side. The sector is also hammered by clients’ preference to use old data instead of shooting new ones in a bid to cut costs.
So, the downward earnings trajectory could signal a buying and/or shorting opportunity depending on investment time frame and strategy.
Oil or Gas, One Sector Does It All
Energy stocks, including shares of services companies, tend to be higher beta, so the sector still has to balance the downside risk of the global growth environment. But as the world journeys on a recovery path, likely with rising oil and gas demand, there is still a significant multi-year opportunity for earnings growth from the oil macro view. (Fig. 4)
In addition, oil services is one sector that stands to benefit from the expected uptrend of either crude or natural gas, or both. With crude and natural gas prices outlook remain diverged in the medium term, this unique characteristic could be a good hedge in any energy/commodities investment portfolio.
Disclosure: No Positions
Tags: Bailout Plan, Capital Budget, Cold Temperatures, Commodities, Economic Forecasts, European Leaders, Global Demand, Government Data, Jobless Claims, Mmbtu, Natural Gas Prices, Offshore Oil, oil, Oil Majors, Oil Service, Oil Services, Relative Stability, Rig Count, Risky Assets, Service Markets, Term Investors, Time China, Warren Buffett
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Thursday, February 11th, 2010
David Rosenberg writes today that with the Greece issue on the backburner again, benign economic news from China and Australia, it appears that risk appetite is back on. The dollar and yen are selling off:
Global investor risk appetite is back on the front burner with the U.S. dollar and Yen selling off; oil, copper and gold rallying; bonds trading defensively (actually selling off noticeably in Europe); equities firming across the board with Asian markets up 1.8%, emerging markets up 1%, and the global MSCI index up 0.5% at the moment.
EU policymakers are meeting with an aim to backstop Greece’s financial problems — all we need are headlines like that to pop up every day so that investors can keep on breathing a sigh of relief. And, the data were also Goldilocks in nature. China’s inflation rate fell to 1.5% YoY in January from 1.9% and well below the 2.1% consensus estimate, and hence another reason to breathe a sigh of relief since this alleviates concerns over another round of policy tightening.
Then we had Australian employment come out and ratified the view that the global economy is humming along at a very nice clip — jobs rose 52,700 in January, which was more than triple what the consensus community had penned in and the unemployment rate dropped to 5.3% in January from 5.5% the prior month.
The concerns from yesterday over what Ben Bernanke had to say that at some point in the future the Fed will have to start snugging liquidity, and do so without initially touching the funds rate but rather widening the spread between it and the discount rate, conducting reverse repos and raising interest rates on commercial bank deficits at the Fed, has totally dissipated. Meanwhile, the problems in the U.S. housing market continue unabated with the number of foreclosure filings (RealtyTrac data) topping the 300k mark for the 11th month in a row in January (nice to see the Obama modification plan at work) — 315,716 to be exact, up 15% from a year earlier. Banks also repossessed more than 87,000 homes last month, down 5% from December but still up 31% from January 2009.
Moreover, for all those pundits believing that companies are about to embark on a capex cycle, they should consider that the data so far for Q4 show that the reporting S&P 500 companies have thus far boosted their cash holdings by 78% YoY, to $1.2 trillion, and have cut their spending budgets to $30 billion from $41.5 billion.
Source: Breakfast with Dave, February 11, 2010 (free registration required)
Tags: Asian Markets, Australian Employment, Backburner, Backstop, Ben Bernanke, China, Consensus Estimate, David Rosenberg, Economic News, Emerging Markets, Global Economy, Global Investor, Gold, Greece Issue, Housing Market, Inflation Rate, Investor Risk, Msci Index, oil, Repos, Risk Appetite, Sigh Of Relief, Unemployment Rate, Yoy
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Tuesday, February 9th, 2010
Below is an excerpt from Breakfast with Dave, February 9, 2010.
“We highlighted yesterday what this means for asset classes and sectors: If past is prescient, it would mean a test of 900 on the S&P 500 with defensive “yield” sectors taking over leadership (utilities, staples, health care — in fact, biotechs have held in very nicely during this recent market selloff). Bonds outperform stocks (with the Treasury market undergoing a bull-steepener — though see below why a bond rally may be led by the longer end of the curve this time around). Volatility increases substantially. Credit spreads widen and commodities get crushed. This is a time for conservative investing with cash on hand to be put to work once better valuations emerge — we are not quite there yet, in our view.
“It always pays to look and see how the market is positioned — this would have helped a lot when the appetite for risk peaked in late 2007 and reappeared in early 2009. So, we look to the Commitment of Traders report that is published every week and look at the “net” long or short position across the various asset classes (futures and options), particular among the ‘non commercial’ accounts, which is a proxy for the ’speculators’ or momentum investors.
We found that even after the move towards risk aversion and defensive positioning in recent weeks, there may be more to go. The VIX still has a net short position of 2,395 contracts. There are 9,225 net long Dow contracts and as far as the S&P 500 is concerned, speculators are still net long 99,675 contracts. The Australian dollar still commands a net long position of 33,524 contracts; and 17,209 net long contracts out there for the Canadian dollar.
There are 90,709 net short contracts with respect to the 10-year Treasury note, but 173,637 net long positions for the 2-year Treasury note (this would actually augur then for a bull flattener if these shorts on the 10-year not close out). The long bond is still net short by 92,358 contracts — again, if these shorts are covered then we could get one humdinger of a rally at the back end of the Treasury curve.
In the commodity space, only natural gas has a net short position (81,010 contracts) – there are 160,232 net long crude oil contracts, 222,282 net long gold contracts and 18,069 net longs on copper. Invest accordingly.
All we can say is that here we are with a 0% policy rate, a $2.2 trillion Fed balance sheet and a massive 10.5% deficit-to-GDP ratio and the strong undertow of deflation has not gone away, and governments have few, if any, bullets left in the chamber. We have industrial metals prices coming under downward pressure, price wars in the telecom sphere, and of course, ever since the Department of Agriculture told us last month that this year will provide a bumper crop of farm products, we have seen the likes of corn prices plunge 16% and soybeans by 7% (see page C1 of the WSJ for more). Below we list how to position the portfolio for a deflationary backdrop.”
FIVE WAYS TO PROTECT A PORTFOLIO IN A DEFLATIONARY BACKDROP
- A focus on safe yield, wherever you can get it. High-quality corporates (non-cyclical, high cash reserves, minimal refinancing needs)
- Equities: focus on reliable dividend growth/yield; preferred shares (”income” orientation)
- Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios – balance sheet quality is even more important than usual. Avoid highly leveraged companies at all costs.
- Ultra-selectivity with regard to financials. Same for retailing.
- Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care).
Tags: Asset Classes, Australian Dollar, Biotechs, Canada, Canadian Dollar, Commercial Accounts, Commitment Of Traders, Commitment Of Traders Report, Commodities, David Rosenberg, Futures And Options, Gold, Momentum Investors, Move Towards, oil, Risk Aversion, Selloff, Short Position, Speculators, Staples, Treasury Market, Valuations, Vix, What This Means, Year Treasury Note
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Tuesday, February 9th, 2010
This article is a guest contribution from Barry Ritholtz, or the BigPicture.
Yesterday’s WSJ had an article about Canada’s Housing market. (Housing Rebound in Canada Spurs Talk of a New Bubble). The article noted that “Average home prices in Canada have risen 23% from their trough in January 2009. Home-sales volumes are up 70% over the same period . . . Canada’s housing recovery has been so rapid that some here are worrying about a bubble.”
But to call it a rebound misses the point. As the Cleveland Fed pointed out, Canada’s housing market never went bust — there was a sales dip, but nothing like the US. And prices have continued to go higher to the point where the Journal is now discussing them in terms of bubbliciousness.
Why is that?
There are a variety of reasons why Canada’s market held up better than that in the US, but I boil it down to the big four:
1) Lending Standards: Were increasingly non-existent in the US from 2001-07. On the other hand, Canada never had the non-bank lenders that abdicated these standards en masse. There was no “Lend-to-Securitize” business model in Canada.
2) Mortgage Insurance: Mortgage with less than 20% down payment are considered a high LTV ratio (This was 25% previously). Mortgage insurance is required. Over 80% of Canada’s homes have what was commonly known as PMI in the US.
3) Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave.
4) Single Regulator, Lack of Regulatory Capture: The hodge podge of Federal and State regulators encourages forum shopping; it also masks much of the massive lobbying effort by US banks and investment houses. Lobbying dollars don’t seem to be nearly as pernicous or corrupting Noprth of the border.
The Cleveland Fed also noted that subprime mortgages accounted for a fifth of all US mortgages originated between 2004–2006. In Canada, the subprime market share was roughly 5% percent in 2006—compared to 22% percent in the U.S. And the Canadian never expanded significantly into the wackier exotic mortgage products — IOs, Neg Ams, Piggy Backs, etc. (interest-only and negative-amortizations grew rapidly in the U.S. from 2003 to 2006).
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US vs Canada Delinquency Rates
US vs Canada Home Prices
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Sources:
Housing Rebound in Canada Spurs Talk of a New Bubble
PHRED DVORAK
WSJ, Feb 8, 2010
http://online.wsj.com/article/SB10001424052748703808904575025100730017666.html
Why Didn’t Canada’s Housing Market Go Bust?
James MacGee
The Federal Reserve Bank of Cleveland 12.02.09
http://www.clevelandfed.org/research/commentary/2009/0909.cfm
What Toronto can teach New York and London
Chrystia Freeland
FT, January 29 2010
http://www.ft.com/cms/s/2/db2b340a-0a1b-11df-8b23-00144feabdc0.html
Additional Sources:
Nobody’s saviour
TARA PERKINS
The Globe and Mail, Apr. 20, 2009
http://www.theglobeandmail.com/report-on-business/article1138040.ece
Homeownership Rate Falls Back to Pre-Boom Level (Economix)
http://economix.blogs.nytimes.com/2010/02/02/homeownership-rate-falls-back-to-pre-boom-level/
Jumbo Mortgage ‘Serious Delinquencies’ Rise to 9.6%
Jody Shenn
Bloomberg, Feb. 8 2010
http://www.bloomberg.com/apps/news?pid=20601110&sid=at0fpRHaUHhE
Tags: Bank Lenders, Barry Ritholtz, Borrowers, Canada, Canada 2, Cleveland Fed, Hodge Podge, Housing Bubble, Housing Market, Insurance Mortgage, Investment Houses, Ltv Ratio, Mortgage Debt, Mortgage Insurance, oil, Pmi, Recourse, S Market, State Regulators, Subprime Market, Subprime Mortgages, Wsj
Posted in Markets | 5 Comments »
Tuesday, February 9th, 2010
Terry Macalister of the Guardian reports
15% fall in share dividends leaves pensions exposed:
British companies paid out £10bn less in dividends in 2009 compared with the previous year leaving pension and other investment funds dangerously dependent on carbon-heavy oil groups, BP and Shell, for a quarter of all such income, new research shows.
A total of £57bn was handed out to shareholders last year, 15% less than in the previous 12-month period, with 202 firms cutting their dividends and 74 paying nothing at all, according to Capita Registrars Research.
The data shows the financial crisis led to a £6bn fall in dividends from the banks, leaving drug, tobacco and oil companies to fill some of the gap.
“The recession has hit dividends particularly hard because companies have not only had to cope with falling profits, but also massive pressure on their ability to finance themselves. Preserving cash has been a top priority,” said Paul Taylor, head of dividends at Capita Registrars, who used data provided by the financial information specialists Exchange Data International to prepare the report.
“Much of the banking sector is either in state or foreign hands, while the ability of the remaining independents to pay dividends is severely constrained by the need to rebuild their balance sheets… Among retailers, only the supermarkets have managed to keep the dividends flowing,” he added.
Capita points out that investors are now “heavily dependent” on just five companies – BP, Shell, HSBC, Vodafone and GlaxoSmithKline – for 47% of all dividends, giving those businesses enormous clout in the investment markets and around government.
Yet Shell faces demands from its own shareholders to move away from its controversial tar sands investments in Canada, while the Co-op’s investment arm will today unveil plans to oppose BP’s involvement in this area.
“The increasing dominance of the oil companies has left investors highly dependent on a few big stocks to provide them with an income,” said Taylor. “Oil has fuelled the engine of UK dividends in the last two years. Lower oil prices, tighter refining margins, slower production growth and unfavourable currency trends have put profitability under pressure at the big oil companies and will make it tougher for them to increase their payouts to shareholders. Indeed, the latest news from the oil sector may even mean our forecast for 2010 is optimistic.”
Shell reported last week a 75% downturn in profits during 2009. It said there would be no further increase in the first quarter of 2010 as the future looked difficult. BP also gave a downbeat assessment of future trading opportunities.
Capita believes dividend payments from UK companies should recover with the economy over the next year, reaching an estimated £60bn, 5% up on 2009.
Meanwhile, UK companies raised a record £73bn from new equity as banks and other businesses fought to rebuild their balance sheets. “There has been an unprecedented flow of capital from investors to companies,” said Taylor.
Investors are also betting on a UK recovery. Daniel Thomas of the FT reports that pension funds pile into UK property:
Pension funds and other institutional investors committed the most money to the UK commercial property sector on record last quarter, in spite of continued fears of a further drop in values this year.
Institutional property funds raised more than £3.2bn last quarter, dwarfing the previous peak of £1.7bn collected in the boom of the market in 2006. This is the highest since records began in 1998.
Official numbers from the Association of Real Estate Funds show that UK unlisted pooled property funds attracted £2.9bn in the fourth quarter on a net basis, much higher than the £400m raised in the third quarter.
The sudden influx of new capital from institutional investors reflects the wider shift in sentiment towards UK commercial property, which has seen a bounce in pricing since last summer after almost halving in value. Retail investment funds have also recently seen record amounts raised to invest in commercial property.
John Cartwright, AREF chief executive, said: “Last year was a volatile year, but it ended on a positive note with record new money coming in to the funds, as well as the final quarter showing extraordinary growth in returns.
“This marks the second quarter of positive net sales, signalling the resurgence in popularity for property funds. Interestingly, while retail investors remain active, we have also seen significant new money from institutional investors who tend to have longer-term investment horizons.”
However, the speed of the recovery - which has seen capital values grow by 10 per cent in six months - has led to fears that there will be a second dip in values. These fears have been exacerbated by weak fundamental reasons to invest in real estate, with rents under pressure.
Analysts said these reasons, in addition to pressure from the end of the Bank of England’s quantitative easing scheme, may have meant that the “easy money” from the bounce could have been made.
Fund managers, however, say they are investing for the longer term, typically for more than five years, meaning a further dip would not be a disaster.
AREF said the net asset value of the sector had reached £25.2bn by the end of last year, down from £26.2bn the year before.
Gross sales for 2009 were £4.5bn, up from £567.3m in 2008, while net inflows were £3.2bn, a reversal of funds, given net outflows in 2008 of £224.2m.
The UK property market stands to gain the most from all this influx of pension assets looking to scoop up commercial property at attractive prices. Will this be a great long-term investment? That depends on a lot of factors, chief among them, will the world avoid a protracted deflationary episode?
If it does, then it may make sense to pile into UK and US commercial real estate now. If it doesn’t then pensions will be waiting a long time before they see any meaningful price appreciation on these investments. The same goes for those incredibly shrinking dividends.
Tags: Balance Sheets, Banking Sector, Canada, Capita Registrars, Enormous Clout, Exchange Data International, Gap, Glaxo Smithkline, Heavy Oil, Information Specialists, Investment Arm, Investment Funds, Investment Markets, Macalister, oil, Oil Companies, Oil Groups, Paul Taylor, Previous Year, Share Dividends, Tar Sands, Taylor Head, Top Priority
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Tuesday, February 9th, 2010
The choice selections from today’s Art Cashin comments, via UBS Financial Services:
Greek Rescue Rumor And Chippier Consumer Brings Stocks Back From Brink – For much of Friday’s session, fears about the European Union (particularly Greece) sent folks seeking the safety of the dollar. That, in turn, put pressure on oil; gold and stocks as carry trades were liquidated. The carnage began in earnest as the European markets closed. The dollar began to move steadily higher causing the above-noted damage.
The dollar driven selling was not as vicious as the selling on Thursday, but around 12:45 things started to turn rather ugly. They got even uglier as they headed to the day’s lows at 2:00. Rumors circulated that a trading firm in the crude pits was being forced to liquidate contracts.
But, shortly after 2:00, bids began to pop up in stocks as the dollar eased back. With some investigation, traders learned that there were rumors, or at least speculation, that the ECB and others might be cobbling together a rescue package for Greece over the weekend.
Stocks began to cut their losses as did gold. Crude remained hobbled by those liquidation rumors but cut its losses nonetheless. At 3:00, stocks picked up another tailwind. Consumer Credit fell $1.7 billion not the $10 billion some economists had projected. The hope that the American consumer might be willing to consume again helped the late rally.
That late rally was a bit of a mixed blessing. Had they closed on the lows, the probable course of the market might be a touch clearer. A close at the lows would have suggested an “oversold reflex rally” for Monday extending half-way into Tuesday’s session. The rally would then fail followed by a sharp and severe selloff. The late rally took that specificity off the table. We’ll have to review the napkins for clues to the amended course.
Greece And the Gordian Knot – As noted above, the late rally was sparked by speculation that there would be a rescue package announced over the weekend. When no announcement came forward, there was no follow-through on the rally.
The latest speculation is about the inverted yield curve for Greek bonds. That doesn’t allow any wiggle room or time to ease into austerity. Therefore “instant austerity” runs the risk of public backlash, strikes and maybe even unrest in the streets. To buy some time, some folks speculate, that the ECB or some entity could guarantee short term Greek debt – maybe up to one year. That might buy some time. It will be interesting to see if that’s the road that is taken.
Cocktail Napkin Charting – As noted above, the late Friday reversal rally was primarily the result of rumors of a Greek rescue package. There were also technical contributors to the bounce. The S&P made its intra-day low at 1044. That’s its 200 day exponential moving average. Both Walter Murphy and Stock Market Cycles had listed 1043 as a probable target (darn good call).
Friday’s lows will be a critical testing area on any future pullbacks. If they are violated, things could turn very ugly although some see more support at 1030/1035.
For today, the napkins suggest early support in the S&P may be around 1048/1052 with the backup 1040/1043. Resistance looks like 1070/1074 and then 1080/1085. We need to be careful because the Friday bounce may have released enough of the oversold to allow the bears another shot.
Consensus – Watch the dollar and the headlines and rumors from Euroland. If the dollar rallies smartly, things could get very ugly. Stay very nimble.
Trivia Corner Answer - To heir today - The middle son brought the ailing horse an apple every other day. Today’s Question - Heads up! Each of the following 4 letter words can be made an 8 letter word by adding the same 4 letter word to each one. (Example - If we gave you step, ball, hold, work, path & fall….the answer would be “foot”). What word fits - A) Some; Pick; Bill; Book; Rail. B) Line; Style; Long; Boat; Like; Size. C) Ding; Boy; Man; Vampire. D) Kingdom; Way; Nations, State.
(h/t ZeroHedge.com)
Tags: Art Cashin, Brink, Carnage, Choice Selections, Consumer Credit, ECB, Economists, European Markets, Gold, Gordian Knot, Lows, Mixed Blessing, Napkins, oil, Pits, Rally, Reflex, Selloff, Specificity, Speculation, Ubs, Ubs Financial Services
Posted in Markets | No Comments »
Monday, February 8th, 2010
European and U.S. stock markets have taken a hit recently as spooked investors from Shanghai to Sao Paolo were fleeing risky assets amid concern that the financial crisis in Portugal and Greece could spread through the euro zone with vast implications for the fate of the fragile global economic recovery. (Fig. 1)
Liquidate & Buy Dollar
A steep drop in crude-oil prices triggered declines across the commodities spectrum, as investors nervous about the pace of the economic recovery gravitated back to the dollar. Crude oil tumbled to a seven-week low of $71.19 a barrel last Friday, down 14% since the 2010 high of $83.18 reached on Jan. 6.
Investors’ fled for safety drove the U.S. dollar near a nine-month high against the euro. Emerging market currencies also weakened in Asia, while U.S. stocks fell a fourth straight week, the longest streak since July.
A Shift of Sovereign Risk
According to EPFR Global, risk aversion has prompted a withdrawal of $1.6 billion from emerging market equity funds during the week ending Feb. 3, the biggest outflows in 24 weeks, and $516 million has left Asian equities outside of Japan.
The charts from CDR (Credit Derivatives Research) tell the story of this investors’ perception. According to CDR, there has been a dramatic shift of risk in developed nations relative to emerging and less-developed nations when comparing three sovereign risk indexes, SovV, EM and CEEMEA. (Fig. 2)
In SovX, the GIPSI (H/T Zero Hedge) - Greece, Italy, Portugal, Spain and Ireland, represent around 65% of the index risk. In EM, Venezuela accounts for 26%, Turkey, Brazil, and Argentina represents 12% respectively of the EM risk. In CEEMEA, Turkey and Russia represent 49% of the index risk (followed by Hungary and Ukraine each at over 8%).
In addition, CDR finds that the sovereign risks of the emerging economies appear to be closely tied to the price of oil:
“It would appear that the CEEMEA and EM sovereign risk indices are threatened more by commodity price pressures than credit risk currently - and given the ‘relatively’ high price of oil/gas, their risk remains less of a concern than developed nations where the Ponzi appears to be in question.” (Fig. 3)
Oil Price - A Key Risk Factor
Emerging market countries, such as Brazil, China or India, are evolving since the early 90s. During this period, the issuance of bonds by these countries has increased significantly reflecting their needs for substantial long term and infrastructure investment.
Among the many determinants of risk bonds, the price of oil is a key factor as it plays a significant role in economic growth, inflation, production costs, trade balances and currency. Nine of the 10 economic recessions in the United States since the end of World War II were preceded by a dramatic increase in the price of oil.
A Sensitivity Issue
Oil prices nowadays are extremely volatile, and sharp fluctuations in oil prices contribute to macroeconomic volatility all over the globe. The impact of this volatility on economy varies according to a country’s relative dependence on oil production and exports.
For oil-exporting countries like Russia and Saudi Arabia, a rise in oil prices caused a perception of risk reduction relative to its obligations. Conversely, an oil-importing country sees its risk index increase due to a barrel price shock.
Financial Crisis 2.0?
Last week’s wild commodity price swings underscore how investors aren’t totally convinced that the world economy is on an upward trajectory. Investors are worried that multi-governments’ debt problems will spread globally similar to the subprime crisis in 2008.
In addition to concerns about GIPSI sovereign debt defaults in the 16-nation euro zone, the U.S. is grappling with its own deficits and the high jobless rate, while China began restricting lending last month to prevent high inflation.
Some analysts expect global commodity prices would eventually firm up reflecting economic recovery albeit high volatility; and fundamentals should increasingly dominate expectations and drive prices.
But there are others see the current “correction” as caused by factors very similar those brought on the “financial crisis of 2007-2010” and warned this could signal “a new crisis in development.”
Seeking Negative Beta
In this environment, a defensive play would be to invest or allocate a portion in regions that are less prone to the price of oil, which is a significant sovereign risk factor. Sector wise, agriculture and alternative investment vehicles in real estate or land development should provide some good diversification to any long term portfolios.
Jeff Rubin, Chief Economist at CIBC World Markets pointed out that the United States is less sensitive to oil price volatilities because it is itself an oil producer (5 million barrels out of 19 million barrels the US consumes are produced in the US), so it receives some of the benefit of both higher and lower oil prices. An IEA analysis also indicated that the U.S. should be less affected by oil price shocks than Japan, OECD and Euro zone. (Fig. 4)
This competitive edge probably partly explains how investors still see the U.S. dollar as a safe haven, and Mr. Geithner’s optimism that more debt won’t hurt U.S. credit rating, in spite of the fiscal and economic challenges quite similar to what the Euro Zone is facing.
BRIC minus R
In addition to the United State, GDP growth in Brazil, China and India could get boost from the softening and stabilizing of oil prices and should increase their competitiveness. Brazil and Chindia are all oil producers with aggressive state-sponsored exploration and production efforts and strong economic growth prospect. Brazil, with a new and improved investment grade credit rating, is now largely self-sufficient and has insulated its economy from oil price shock on net basis.
The economic impact of oil prices on oil-importing, developing countries such as China and India could be more pronounced primarily because Chindia are more energy-intensive due to its strong growth rate, and less energy efficient. From that perspective, Chindia, though good prospects could be more of a roller-coaster ride for investors.
Among the emerging economies, lower crude oil prices will be a big dampener for Russian economy. Russia’s two oil wealth funds declined by a total $1.54 billion over the last month, as more funds were transferred to aid federal budget shortfalls. The Reserve Fund, one of Russia’s two oil wealth funds, is expected to run out by the end of 2010.
Hat Tip: Professor Pinch
Tags: Asian Equities, BRIC, China, Commodities, Credit Derivatives, Crude Oil Prices, Derivatives Research, Developed Nations, Dramatic Shift, Emerging Economies, Emerging Markets, Equity Funds, Euro Zone, Gipsi, Global Risk, Greece Italy, India, Market Equity, oil, Portugal Spain, Price Of Oil, Risk Aversion, Risky Assets, Sovereign Risk, Sovereign Risks, Steep Drop
Posted in Emerging Markets, India, Markets | No Comments »
