Chain Bridge Investing » OPEC

Matt Simmons: Oil Industry Needs a Shock, Oil Supply is at Risk

CB — Sun, 24 Jan 2010 11:45:35 +0000

CB found an archived interview that King World News conducted with Matt Simmons, head and founder of Simmons & Company International, on November 13, 2009 regarding his thoughts on the current state of the oil industry. The full 23 minute interview can be accessed from the King World News Website. For those who don’t know, Simmons is respected in the industry, but is also considered a controversial figure with his speeches and presentations that claim the oil industry is in much more trouble than the public and media realizes. He has written the popular book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy and many of his speeches and presentations can be accessed on his company’s website. The following are key informational points taken from the interview:

(1) The interview began with Simmons thoughts on the an article by the Guardian regarding the International Energy Agency (the “IEA”) inflating oil reserve figures at the request of the U.S. to avoid panic buying at realization of the looming shortage. As far back as 2004, Colin Campbell a former executive with Total France, stated that if the real oil reserve numbers were to come out, then there would be a panic in the stock markets. Simmons believes that until recently, the IEA was more of a cheerleader for the cheap oil, than the oil watch dog it was supposed to be. Yet, the current chief economist at the IEA became convinced more than a year ago that the agency lacked the necessary data to understand when peak oil will likely occur. As a result, he led an effort to revamp the models and analyze the data better. Consequently, the report released a year ago painted a better picture of the oil industry’s reality than it had previously. The report stated that in order to maintain the current demand levels from the present to 2030, the equivalent of four new Saudi Arabias would have to be added. This would be extremely challenging to accomplish. Furthermore, if demand reached the 106 million barrels a day that the IEA projects with conservative assumptions, then the world would need another two Saudi Arabia in addition to the four mentioned above.

(2) Simmons’ belief is that the flow of oil peaked in 2005. There have been unexpected declines in production in North Sea and Mexico.

(3) Oil is not a commodity, there are different qualities, or grades, of oil. The best grade is condensate, which is of such quality that it can almost be used directly in a fuel tank. Then there is light sweet oil, which doesn’t have to undergo a process to remove sourness. Then there is medium oil. Followed by heavy oil. The worst is heavy-sour oil. More refining processes are necessary as one uses worst grades of oil. As production moves from the best grades to the worse grades, much more energy is required to produce a usable product, thus reducing the net energy produced.

(4) According to IEA, most of the increase in future output would have to come from the current OPEC. At present, Saudi Arabia claims to have 11.5 million barrels a day of productive capacity, which it believes can be increased to 12.8 million barrels a day once the country completes its expansion projects. Simmons states that there is reliable data that shows it is questionable that Saudi Arabia can actually produce more than 8 million barrels a day. Also, there are beliefs that some of these new projects will not work.

It is believed that most of the new production would have to come from OPEC countries. However, oil fields in both Iran and Iraq are in poor shape. In Iraq, if those fields produce significantly more than 1 million barrels a day, they will most likely collapse. Yet, if they produce near 1 million barrels a day, then the fields might be able to last 20 years (in the Daily DL for 12-14-09 there is an article by the Financial Times where Shell states that it plans to increase Majnoon’s, a large Iraq field, production to 1.8 billion barrels a day). Meanwhile, in Iran the country has not found the gas necessary to re-inject into the large oil fields to stabilize their decline. As a result, Angola, Algeria and Libya are the OPEC countries that may be able to increase their production, however, these countries will not be able to meet demand.

(5) Will take over $100 trillion to properly address the “zombie list,” which Simmons uses to summarize the following issues: (1) fewer geologists; (2) a aging workforce; (3) rusting infrastructure; and (4) a lack of technological innovation. The industry has not upgraded its corrosion control since the 1960s. The oil industry’s infrastructure continues to rust away. The industry risks losing a majority asset base in the next five to 10 years.

(6) Simmons continually emphasized the need for data reform within the oil industry. It is well known that there is a significant amount of data that is unreliable. Furthermore, there are aspects of the industry like production flow, which the industry does not tend to collect and aggregate data to analyze. If the data reform does not occur, then there will be an future shock in oil that will surprise many people and countries. Consequently, Simmons thinks that such a shock could cause wars to occur. As a side note, Simmons also states that the world’s water problems may actually be worse than its oil problems.

(7) Simmons thinks that the recent deep water discoveries off of the coast of Brazil will be extremely challenging. Basically, the oil producers cannot be certain of the quality of the crude until the wells have been flow tested for nearly a year. At first, due to the intense pressure on the wells, the producers know that the first oil will be light, but do not know the variation in the quality of crude that lays beneath the first oil produced. Simmons states that the world is about a decade or two away from knowing what exactly is in the Brazilian basin. The media is rushing to assumptions about the quality and contents of these fields. BP labeled a field proven with only one test well, which Simmons believes more data is required before such a claim can be made.

CB: In the Daily DL for 12-18-09, there is a Wall Street Journal article that discusses Brazil’s, or rather Petroleo Brasileiro’s, future role in oil supply.

(8) Simmons believes that China and India will continue to drain oil production. The U.S. has prided itself in car ownership, and China is currently developing a similar pride. China is now the main buyer of vehicles. Currently, China has 18 cars per 1,000 people, while in the U.S. there are 850 cars per 1,000 people. If both China and India were able to hold their population growth constant and achieved a per capita oil consumption near Mexico’s, then an additional 45 million barrels a day would have to be produced, which Simmons does not think is possible.

Chain Bridge Investing (“we” or “CBI”) states at the outset that the opinions, judgments and derivation of thinking in this writing are solely Chain Bridge Investing’s. It is imperative that any judgment or valuation you take from information dispersed by CBI be examined within the context of your portfolio investment and overall objectives. To that end we urge you to contact your investment advisor or portfolio manager to insure that the information or suggestions proposed by CBI conforms to your needs and financial strategy.

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Daily Download: Financial and Stock Investing News for 12-23-09

CB — Wed, 23 Dec 2009 12:09:56 +0000

Good morning, investors and traders! You are reading the Daily Download (”Daily DL”), which includes summaries and links to the day’s selected economic and stock investing news. The Daily DL is maintained by Chain Bridge Investing (“CB”), which is a financial blog at www.chainbridgeinvesting.com. Chain Bridge Investing is constantly improving and adding new financial and investing content to the website. Please let us know if you have any suggestions at the following email address: .

General News & Headlines Summary

The next two weeks are likely to be slow on the news front, thus some of the Daily DLs may have less content than usual.

CB Random Thought: Given all the blogs and posts regarding Ben Bernanke’s selection as Time’s Person of the Year, CB has to wonder if this was not done as a means of creating significant controversy and generating additional press for Time.

News items not covered below are as follows: (1) Berkshire Hathaway continues to cut its stake in Moody’s Corporation as it sold 87,992 shares on December 18th for $26.77 a piece; (2) Take-Two Interactive Software announced that it has agreed to sell its Jack of All Games distribution business for $43.3 million to Synnex Corporation and reduced its guidance accordingly; (3) Capcom, the video game publisher, cut its sales forecast for the fiscal year by 34% and stated it will delay the release of its Lost Planet 2 until the second quarter in order to avoid competition with many of the high profile games being released in the first quarter; (4) State Street, the third-largest global custody bank, announced its $2.5 billion cash acquisition of Intesa Sanpaolo’s securities business in Europe, which fits State Street’s goal to further build its European and Asian businesses to represent nearly 50% of its overall revenues; (5) India, the new world leader in the super-compact car market, now produces and sells more super-compact cars than Japan; (6) FPL stated that its full-year guidance for 2009 earnings will be reduced by 17 to 21 cents a share primarily due to an outage at a nuclear power plant, but the company maintains its 2010 guidance; (7) Geithner states that the government will prevent another wave to the crisis; and (8) the Shaw Group stated that it completed the installation of technology on three coal-fired plants in Maryland that can cut emissions of sulfur dioxide by up to 98%.

Upcoming Economic Data for the Day (all times EST)

7:00 AM MBA Purchase Applications

8:30 AM Personal Income and Outlays

9:55 AM Consumer Sentiment

10:00 AM New Home Sales

10:30 AM EIA Petroleum Status Report

Initial Public Offerings (”IPOs”) for the Week of December 21- 25, 2009

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet (Due to technical problems with one of the data suppliers, the Daily Market Sheet is unavailable for today, it will return tomorrow if the troublesome conditions are resolved, or a solution can be worked on CB’s side. We apologize for the inconveinence.)

News

Top Hedge funds Bet on Big Yields Rise – Financial Times

Summary: Some hedge fund managers like John Paulson and Julian Robertson are placing bets that the long-term yields on U.S. Treasuries will increase in the future. These managers believe that it will be difficult for the government to withdraw its stimulus measures from the economy, and thus lead to an increased monetary base as well as money supply, which will create more inflation. As a result of increased inflation, interest rates will increase. To profit from their ideas on higher yields, these managers are buying options that become profitable as bond prices fall and yields rise. As of Tuesday, the yield on the 10-year Treasury was 3.75% compared to 3.2% at the end of November. Yet, some fund managers worry that due to the Fed’s heavy involvement in the U.S. Treasury market yields will be constrained from moving higher. As a result, some managers are buying out-of-the-money “high strike receiver” options that are very cheap and would produce large pay offs if rates were to reach 7% to 8% and minimize losses if that situation does not occur. There are memories of the similar trades betting on higher interest rates being made in the 90s with Japan, but people underestimated the extent of the deflation and lost large sums of money when interest rates did not increase.

Toyota Presses Suppliers to Slash Prices – Financial Times

Summary: Feeling pain from the current recession and the increased value of the yen, Toyota told its suppliers that for its 2013 product line the company expects many components to cost 30% less. In the past few months, Toyota has been very focused on reducing the overall level of costs and has cut bonuses and gone as far as cutting power to several elevators in their buildings. Some analysts do not believe that the new cost saving goal can be achieved by Toyota’s supplier network alone. Instead, they believe Toyota will have to determine which components are commodities and then seek the relevant new suppliers for the commodity componets in cheaper countries like China.

OPEC Indicates $70-$80 Oil Price Target – Financial Times

Summary: OPEC indicated that it will manage its output in an attempt to keep oil prices near the$70 to $80 a barrel range for 2010. Some suspect OPEC has two primary motivations for its current pricing target: (1) the current price target is low enough to continue to support the economic recovery; and (2) to avoid future reductions in permanent demand. As a result of the crisis, oil demand among the Organization of Economic Cooperation and Development (“OECD”) appears to have been permanently reduced, while non-OECD countries have experienced a slower rate of growth for oil demand, which is a consequence of new policies and changing consumer behavior. Furthermore, OPEC expects global demand for oil to increase 800,000 barrels a day next year, compared to the International Energy Agency’s estimate of 1.5 million barrels a day for the same period.

Tax Credit Gives a Lift to Housing – The New York Times

Summary: The following economic data was disclosed in the article:

(1) According to the National Association of Realtors, existing home sales increased 7.4% in November to a seasonally adjusted annual rate of 6.54 million, compared to the 6.09 million annual rate in October. Existing home sales in November increased 44.1% from a year earlier, while inventories, which do not include foreclosed homes held by banks, dropped to 3.52 million homes. Analysts believe that this increase was driven by consumers taking advantage of the $8,000 tax credit for first-time home buyers. Guy D. Cecala, publisher of Inside Mortgage Finance, believes there needs to be many more monthly increases like November’s in order for the market to stabilize. Furthermore, the number of mortgage applications have declined and that does not bode well for monthly home sales in the near future.

(2) According to the Commerce Department, GDP grew at an annual rate of 2.2% for the third quarter, a significant revision down from the original 3.5% that was reported a couple of months ago. The revisions downward were fueled by smaller business inventories and less business investment.

Triple-A Debt Harder to Find – The New York Times

Summary: With Standard & Poor’s (“S&P”) potential downgrade of covered bonds, there will be very few investment options beyond government and quasi-government for thoes who seek AAA rated debt. At present, the AAA rating applies to the following four American companies: (1) Automatic Data Processing; (2) ExxonMobil; (3) Johnson & Johnson; and (4) Microsoft. Yet, during the last five years these companies have issued a total of less than $10 billion of debt. Meanwhile, the AAA asset-backed bond market is currently near half its 2006 size at $69 billion and the municipal bond market also offers less options due to the negative conditions surrounding bond insurers. Yet, there has been a significant increase in government related debt; however, this debt tends to offer lower returns and may hold more risk than previously due to the fiscal difficulties many nations are confronting.

Volatility Dip Speaks Volumes – The Wall Street Journal

Summary: The data suggests that December’s average daily equity-market volume will most likely be at its lowest level since August 2008, while November’s trading volume was dropped 25% from a year earlier. Some evidence supporting the reduction in trading volume can be found in the Chicago Board Options Exchange’s volatility index (“VIX”), which has dropped below 20 for the first time since August 2008. Historically, lower volatility has been negative for stock trading volumes. A couple of the drivers behind the reduced volume levels are related to: (1) hedge funds pulling back their risk for the end of the year, and thus reducing their trading volumes; and (2) outflows from equity-based mutual funds. Companies most likely to be affected by the drop in volume are the online brokerages, the exchanges, and certain operations of the larger banks. This current downturn in volume may have more impact on some firms due to the lower interest rates they are earning on their assets. As a result, trading revenues account for a larger percentage of revenue than usual, thus the downturn will impact the financial results more acutely.

More Links of Note

Guru Outlook: David Tepper – PragCap

Goldman Sachs 2010 Investment Outlook – PragCap

Clarity and Valuation- Hussman Funds

Komansky: The Recession Isn’t Over

Continuing Private-Sector Recession – Forbes

Bill Ackman’s General Growth Properties Rebuttal – MarketFolly

David Einhorn on Storing Physical Gold – MarketFolly

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Daily Download 12-16-09: Debt-Laden Europe, Wholesale Prices, Sovereign Debt Risk, Bernanke on Inflation & More

CB — Wed, 16 Dec 2009 12:32:51 +0000

General News & Headlines Summary

News items not covered below are as follows: (1) Raj Rajaratnam, the founder of the Galleon Group, and Danielle Chiesi, an ex-Bear Stearns hedge fund manager, were formally indicted on Tuesday by a federal grand jury; (2) Best Buy reported a higher than expected profit of $227 million along with a 5% increase in revenue for the third quarter, but the company’s shares dropped after it stated that it expects U.S. gross margin to decline 80 to 100 basis points in the fourth quarter; (3) the Architecture Billings Index dropped to 42.8 in November, down from 46.1 in October, indicating a decrease in billings; (4) the net foreign purchases of long-maturity U.S. securities equaled $8.3 billion in October, down from the $26.7 billion of net purchases in September; (5) Roper Industries will replace Ensco International on the S&P 500 Index on December 22; (6) on Tuesday, Boeing’s 787 jetliner made its first test flight; (7) the Federal Deposit Insurance Corp stated that it plans to hire nearly 1,600 mainly temporary employees and that its budget will surge to $4 billion in 2010 from $2.6 billion in 2009 primarily due to rising bank failures; (8) the market priced Cobalt International Energy’s initial public offering at $13.5o per share versus the expected range of $15 to $17 per share; and (9) OPEC slightly increased its 2010 forecast of global oil demand.

Upcoming Economic Data for the Day (all times EST)

7:00 AM MBA Purchase Applications

8:30 AM Consumer Price Index

8:30 AM Housing Starts

8:30 AM Current Account

10:30 AM EIA Petroleum Status Report

2:15 PM FOMC Meeting Announcement

Initial Public Offerings (”IPOs”) for the Week of December 14- 18, 2009

12-15-09 Cobalt Intl Energy – Deepwater and offshore oil exploration (“CIE”)

12-15-09 Team Health Hldgs – Healthcare professional staffing and administrative services (“TMH”)

12-16-09 Kraton Performance Polymers – Styrenic block copolymers. (“KRA”)

12-17-09 Intl Beef – Holding company and beef processing company (“NBP”)

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Debt Fears Rattle Europe – The Wall Street Journal

Summary: On Tuesday, the euro dropped as low as $1.4505, its lowest levels since the beginning of October. There are fears Europe’s economic recovery may be postponed as the credibility of the euro zone’s stability pact, which is an agreement where countries promised to control spending, is tested. These fears were increased significantly as news of more troubles amongst the Austrian bank system have emerged after the nationalization of one Austrian bank on Monday. Furthermore, the precarious financial situation of the countries of Portugal, Ireland, Italy, Greece and Spain continues to weigh on the minds of market participants. These countries all have low future growth potential and large budget deficits, which most likely will continue to increase. Such woes are a result of structural problems in each nation and will be hard to reverse. For instance, the recent growth in both Spain and Greece was primarily fueled by construction and consumer bubbles. Furthermore, the large amount of corruption that exists throughout Greece’s economy will continue to hinder any economic recovery unless fixed. Moreover, there is evidence that spending cuts in Greece could result in a wave of social unrest, which may deter officials’ willingness to implement the necessary spending cuts. Yet European Union officials do not believe that Greece will need a bailout as long as it successfully implements the measures currently being discussed. If Greece were to need a bailout, it would not technically be able to receive one from European Union countries due to a no-bailout clause; however, officials state that there are ways around the clause, but the European Union, for the sake of its credibility, would prefer Greece to go to the International Monetary Fund (“IMF”) for assistance.

CB: Over the last week, the topic of Greece and sovereign risk have been increasingly discussed in the daily news as well as on CB. The big intrigue for CB is the methods the European Union will use to help Greece, Spain, Portugal, Ireland and Italy recover from their current downturns, while keeping these countries on the euro. Is it possible that these countries will break from the euro in order to control their own monetary policy? According to recent reading, the European Union appears poorly prepared for this situation and does not seem to possess many convincing solutions. Also, the extent of the European Union’s power in aiding these countries appears limited, especially if the recent downturns are primarily due to the structural and cultural problems that exist in each country. For instance, Greece needs to cut fiscal spending and raise more money from taxes. However, with the level of corruption in Greece and the lack of organization within its government, the country will have a hard time collecting taxes and implementing effective spending reductions. This is not a situation where throwing money at the problem fixes everything, especially if the necessary changes may result in social unrest.

One angle that investors and readers should consider is the effect of these troubled countries on the solar photovoltaic market. Spain, Italy, and Greece have represented a significant amount of demand in the solar industry during recent times. Most of this demand was encouraged by significant government subsidies and incentives. Due to the current economic situation of these countries and the potential future fiscal spending cuts, investors interested in the solar industry or that currently have exposure may want to further consider the economic situation of these countries and the subsequent impact on solar and other alternative energy forms. Below is a chart detailing the sources of solar photovoltaic (“PV”) demand for 2008, be sure to click on it for its full size:

For additional reading on the debt situation in Europe one should refer to the following Daily DLs: Daily DL 12-9-09: Greece, Daily DL 12-10-09: Spain, Daily DL 12-14-09: Bond Traders Put Pressure on Debt-Laden Nations

Wholesale Prices, Production Rise – The Wall Street Journal

Summary: According to the Labor Department, the producer price index for finished goods increased by a seasonally adjusted 1.8% in November, compared to a .3% increase in October. The increase for November was primarily fueled by a 6.9% increase in energy prices; however, with the food and energy components excluded the index posted a .5% increase in October, the largest monthly gain in over 12 months. These increases in core prices indicate a potential rising of inflation pressures, but do not imply that the U.S. will experience runaway inflation in the near term. One should note, that this index represents wholesale costs and not retail prices and there is not a direct relationship between the two. Separately, the Fed reported that industrial production increased .8% in November, while the overall utilization of capacity throughout the monitored industries rose to 71.3% in November from 70.6% in October. Furthermore, in November manufacturing production increased 1.1%, while mining output increased 2.1% in November and utility output decreased 1.8%. Some analysts believe that low inventories along with improving orders suggests that manufacturing output will find continued support in the near term.

CB: A more detailed look at the data seems to indicate that much of the current production increases are being driven by rising exports and not domestic consumer spending. If production increases are likely to continue into the future, then consumer spending in the U.S. will have to demonstate sustained increases. It is important to remember that these improving figures represent gains from already depressed levels, and the pre-recession production levels were supported by debt-driven consumer spending. Thus, the pre-recession production levels, given the current economic conditions, should not be expected for the next few years. As a result, no one should blindly take the recent data and extrapolate it. Consumer spending is likely to remain weak as it continues to face the unemployment headwind. Separately, the New York Times reports that the index of manufacturing in New York State dropped to its lowest level since July, after experiencing four consecutive months of increases.

Moody’s Warns on Sovereign Debt – Financial Times

Summary: On Tuesday, Moody’s issued a warning that there were severe potential consequences if central banks did not perfectly implement exit strategies for their monetary support. Moody’s stated that if the exits occur too soon, then economic growth would be stalled and stocks will drop substantially. Meanwhile, if the exits occurr too late, then the financial markets could become unsettled and interest rates on bonds will rise due to the threat of inflation. Both these scenarios have the possibility of resulting in panic. The ratings agency believes that the crisis of public finances is the final stage of the global downturn and thus makes sovereign risk the main concern of 2010. Furthermore, countries, even triple A economies, will most likely experience troubles as they try to reduce their deficits in times of rising interest rates as well as lower growth. The majority of central bank exits are planned during 2010.

CB: CB’s relevant commentary on this item can be viewed in the Daily DL for 11-9-09.

Bernanke Tells Senate Panel Rising Inflation is Unlikely – The New York Times

Summary: Below is Bernanke’s direct response to a question Senator Jim Bunning asked regarding inflation and economic slack. The question the article discusses is the second question (you will need to visit the website to view this part of the Daily DL):

Bernanke Inflation and Economic Slack –

To read the entire filing please go to Senator Jim Bunning’s website.

Has Natural Gas’s Moment Arrived? – The Wall Street Journal

Summary: For years, both residential and industrial consumers have been wary of increasing their dependence on natural gas due to its price volatility. Yet, price volatility may be diminishing as a result of the following: (1) large discoveries in both the U.S. and Canada have increase gas supplies; (2) large infrastructure build-outs have made gas easier to transport across regions, thus reducing regional pricing premiums and discounts; and (3) ExxonMobil’s deal to purchase the largest domestic gas producer is a signal that even the major oil & gas companies see gas as a significant resource. The large oil & gas majors are better equipped than the smaller natural-gas companies to handle the price fluctuations of natural gas and thus are more likely to maintain more continual operations despite short-term price fluctuations, which would normally force smaller companies to start and stop their drilling operations. On Monday, the Energy Information Administration (“EIA”) estimated that projected natural gas prices would remain below $7 per million British thermal units through 2025. Furthermore, Exxon believes that once more strict carbon emissions regulation is implemented natural gas will be a cheaper alternative to coal for producing electricity. At present, the EIA estimates that natural gas will account for nearly 46% of all additional capacity from 2008 to 2035. However, the following concerns regarding the future stability of natural gas prices remain: (1) there is evidence that drilling has a negative impact on the environment, which may lead to regulation and increased drilling costs; and (2) a sudden surge of new demand due to wider adoption could send prices significantly higher.

More Links of Note

Why Nouriel Roubini’s Case Against Gold is Wrong on Every Count – The Business Insider

Fast vs. Slow Knowledge – Abnormal Returns

Why is There so Much Skepticism Regarding the Rally? – PragCap

U.S. Equity Market Sentiment Review – The Big Picture

Dumbest Moments in Business 2009 – Fortune

The Case for Optimism on the Economy – Alan Blinder

The Decade of Decadence – Todd Harrison

Gold: On the Flip Side – Financial Times

The Audacity of Debt – The Wall Street Journal

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Daily Download: Financial and Stock Investing News for 12-14-09

CB — Mon, 14 Dec 2009 10:09:19 +0000

General News & Headlines Summary

News items not covered below are as follows: (1) Accenture, the company with arguably the most exposure to Tiger Woods as a spokesman, severed its ties with Tiger and will seek to formulate a new ad campaign for the future; (2) Abu Dhabi gave $10 billion in financing to Dubai World, of which $4.1 billion will be used to repay Nakheel’s sukak and the rest will be used to help the company’s operations until April 2010; (3) Citigroup will likely unveil the details to a new capital-raising deal early this week; (4) OPEC does not plan to cut output at the meeting next week; (5) in 2011, Toyota states that it will begin selling plug-in hybrids, which will hold a more powerful lithium-ion battery, in 2011 at affordable prices; (6) the U.S. Senate passed a $1.1 trillion spending bill, which contains six of the 12 appropriation bills for the 2010 budget year; and (7) Beijing Automotive Industry Holding struck a tentative accord for the right to produce older models of Saab.

Upcoming Economic Data for the Day (all times EST)

11:30 AM 3-Month Auction

11:30 AM 6-Month Auction

Initial Public Offerings (”IPOs”) for the Week of December 14- 18, 2009

12-15-09 Cobalt Intl Energy – Deepwater and offshore oil exploration (“CIE”)

12-15-09 Team Health Hldgs – Healthcare professional staffing and administrative services (“TMH”)

12-16-09 Kraton Performance Polymers – Styrenic block copolymers. (“KRA”)

12-17-09 Intl Beef – Holding company and beef processing company (“NBP”)

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

Third-Quarter Earnings are Done.

News

Shell Wins “Gold Rush” Iraqi Oilfield Auction – Financial Times

Summary: At present, much of the optimism regarding Iraq and its oil is derived from the potential reserves that exist in a few large fields that have not been explored since the 1970s. The estimates and data on these fields is old, based on antiquated technology, and conservative previous use. Currently, the major international oil companies are participating in an Iraqi auction for the rights to 10 of Iraq’s largest and mostly undeveloped oil fields. These auctions represent the re-entry of foreign oil companies into Iraq for the first time in 37 years. On Friday, Royal Dutch Shell won the right to develop Iraq’s giant Majnoon oilfield and will have a 45% stake, while Petronas will hold a 30% stake and Iraq the remainder. In return, Shell has accepted a low fee of $1.39 a barrel and has stated that it will increase Majnoon’s production to 1.8 million barrels a day, which is much greater than the minimum 700,000 barrels a day determined by Iraq’s oil ministry and the 46,000 barrels a day the field currently produces. With this current auction and one earlier this year, Iraq has put in place the steps necessary for it to reach a national production level of 10 million barrels a day within a decade. Yet, some of the fields that have higher productions costs have failed to draw winning bids as there remains uncertainty regarding the geology and the future of the pipeline infrastructure.

CB: There is a much work that has to be done in order to have Iraq producing near 10 million barrels a day within the next decade. This is a goal and may not be reached due to: (1) geopolitical factors; (2) potential problems during the implementation of petroleum gathering systems; (3) OPEC; and (4) the potential inability to optimize the longevity of fields at such high production rates. Furthermore, much of the current infrastructure is destroyed and needs to be replaced and additional new wells, equipment, and technology have to be implemented. However, one should be aware that the additional production from Iraq could apply downward pressure on the price of oil as time moves forward and if global oil demand continues to be subdued. Yet, OPEC, if it can enforce discipline amongst its members, will likely maintain a quota on Iraq that is significantly below the 10 million barrels a day goal, especially if oil demand growth continues to be lackluster.

Defense Contractors Resist Fixed-Price Jobs – The Wall Street Journal

Summary: The Obama administration is promoting the use of fixed-price deals for defense contracting as a tool to reduce military spending. Before this new push for fixed-priced deals, the more common deal type for defense projects was cost-plus, which guarantees a fixed-profit margin and covers the contractor’s expenses. As a result, these cost-plus projects tend to go over budget due to: (1) the evolving technology; (2) the long-term duration of the project; and (3) the customer’s changes to requirements. Moreover, some critics believe that cost-plus contracts do not force the contractors to control their costs. Yet, critics of fixed-priced contracts argue that these rigid contracts usually result in expensive legal battles over changed requirements and additional costs. At present, Washington is using the fixed-price approach on a $40 billion tender to purchase 179 aerial refueling jets, but the two potential bidders, Northrop Grumman and Boeing, are skeptical of placing bids for a fixed-price contract that will last nearly 20 years. Northrop’s Chief Operating Officer has already stated that the contract would place “contractual and financial burdens” on the company.

Bond Traders Put Pressure on Debt-Laden Nations – The New York Times

Summary: Bond traders are putting pressure on countries with large debt burdens by demanding higher yields on the public-sector bonds that they purchase from these countries. Higher yields have, historically, had a tendency to force the affected nations to become more fiscally responsible due to the increased financing costs. Currently, the bond traders are making their presence felt in both Greece and the U.K.. Last week after Greece’s credit rating was downgraded, the spreads on Greek 10-year bonds rose to highs of 250 basis points over their German counterparts, reflecting increased risks. Furthermore, in the U.K. the yields on gilts were pushed to their highest levels since the financial crisis due to the release of a budget report that did not detail spending cuts. In addition, troubled members of the European Union like Portugal, Ireland, Greece and Spain are turning to the bond markets to raise additional funds, but may run into problems gathering extra funds if bond traders continue to raise the yields on public-sector debt. These countries are at a disadvantage because the monetary policy is not being modified to help them recover. Some analysts believe that continued economic troubles for these countries will force them to break from the currency union; however, other analysts believe that the leaders of the European Union would come to the aid of these distressed European countries.

CB: Some the issues have been covered by CB last week, use the following links for more information: Daily DL 12-9-09: Greece, Daily DL 12-10-09: Spain, Daily DL 12-8-09: U.S. & U.K.

Digital Gridlock Ahead – The New York Times

Summary: AT&T faces a dilemma as mobile data traffic has increased over fifty fold during the last three years on its network, while revenue from this data traffic is growing at a much smaller rate, an annual rate greater than 30%. Consequently, the company faces increasing difficulty of gaining an attractive return on the capital expenditures for continued growth. According to Sanford C. Bernstein & Company, when the estimated costs of capital expenditures are considered versus the data revenue, the data subscribers may add very little to no value to AT&T. Ralph de la Vega, who heads AT&T’s mobile division, stated that the company is searching for a way to have the 3% of customers using 40% of the data traffic to reduce or adjust their usage to prevent the crowding out of other customers. This problem is not limited to AT&T, it extends to many other networks including those in Europe. Yet, if this problem continues, then mobile networks will become a game of capital expenditures and the larger networks will have an advantage as economies of scale and scope become more important.

Gold and Silver Seek to Strike a Balance – The Wall Street Journal

Summary: Since 1970 the gold-to-silver-price ratio has averaged approximately 54 times, but during the crisis in 2008 it jumped to 84 times as scared investors moved their money into gold. At present, the ratio is near 66 times primarily due to the 54% surge in the value of silver, which increased at a greater rate than gold’s 27% gain, during the year. Yet, market participants tend to believe that this ratio needs to decrease to a level in the 50s. The recent decline in the price of gold has a few people believing the ratio could correct itself with a decline in gold; however, gold does not need to decline if silver continues to surge. Nevertheless, Walt de Wet, an analyst, has stated that the ratio is already near its average if only the last 10 years are considered. Additionally, the price of gold may face a headwind if interest rates on the U.S. dollar increase. Such an increase, would make holding dollars more attractive and thus more competitive with gold as an investment.

Economists Warn of Asset-Price Bubbles – The Wall Street Journal

Summary: Leading U.S. and European economists warned that expansive monetary policy and spending policy creates the possibility of asset-price bubbles. Many blame part of the financial crisis on the U.S. Federal Reserve and other central banks who maintained low interest rates post the 2001 downturn. Some analysts believe that certain asset prices, including emerging markets and corporate bond market, are rising to unsustainable levels. Historically, a sign of a bubble has been rising inflation, but due to the amount of economic slack in the system, wages and prices may remain constrained for some time. Furthermore, Paul Volcker believes that the stimulus measures should not be removed yet, but policy needs to ” become more restrictive before the need is obvious.”

More Links of Note

The 5 Reasons Gold is in a Bubble and at Risk of Significant Correction – Pragcap

Active Trader: Retracing Fibonacci’s Steps

Paul Samuelson, RIP – Paul Krugman

FDIC Bank Failures – The Big Picture

Volcker: We Need to Think More Boldly – The Big Picture

Baghdad vs Copenhagen: Oil Companies Bet that Oil Era is Far from Over

We Must Safeguard the Fed’s Independence – Financial Times

‘Titan of Economics’ – The Wall Street Journal

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Daily Download: Financial and Stock Investing News for 12-2-09

CB — Wed, 02 Dec 2009 10:01:47 +0000

General News & Headlines Summary

News items not covered below are as follows: (1) General Motor’s (“GM”) chief executive Fritz Henderson has resigned as he has grown increasingly frustrated with the board of director’s doubts regarding the pace of change at the automaker; (2) on Tuesday, Northrop Grumman Corp. stated that it will not bid on a Air Force tanker plane contract worth at least $35 billion unless the Defense Department changes its rules; (3) according to Continental, system wide traffic for November increased 2.9% to 6.77 billion revenue passenger miles, compared to 6.58 billion revenue passenger miles a year earlier; (4) Bridgestone Americas stated that its tire prices will increase as much as 5% due to increasing raw materials and energy costs; (5) Moody’s Investors Service assigned a negative outlook on Tuesday to the Las Vegas Sands Corp. casino operator; (6) Volkswagen of America Inc. reported that vehicle sales rose approximately 14% in November; (7) NCR Corp. will install more than 200 Blockbuster Express DVD rental kiosks at various Duane Reade drugstores in New York City; (8) according to research firm iSuppli Corp, 6% more TV sets will be sold during the seven-day period that began on Black Friday compared to the same period a year earlier, while prices were 22% lower than prior to Black Friday; (9) Peet’s Coffee & Tea raises offer for Diedrich Coffee to $32.50 per share, exceeding its previous off of $32.00 per share.

Upcoming Economic Data for the Day (all times EST)

7:00 AM MBA Purchase Applications

7:30 AM Challenger Job-Cut Report

8:15 AM ADP Employment Report

10:30 AM EIA Petroleum Status Report

2:00 PM Beige Book

Initial Public Offerings (”IPOs”) for the Week of November 30 – December 4, 2009

12-4-09 Authentidate Holding Corp. – Manufactures personal computers (“ADAT”)

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

List of Selected Companies with Third-Quarter Earnings for 12-2-09

News

Manufacturing Grows, but More Slowly – The Wall Street Journal

Summary: According to the Institute for Supply Management (“ISM”), its index for manufacturing activity dropped to 53.6 in November, compared to 55.7 in October. Although the index dropped, it remained above 50, which implies that manufacturing activity continued to increase albeit at a slower rate. The ISM’s manufacturing index is a weighted average of five sub-indexes, and of these, the employment and production components dropped, while new orders rose to a level of 60.3. Roughly a third of the survey respondents informed the ISM that their customers’ inventory levels were depleted in November, thus implying a likely continued expansion. Furthermore, 12 of the 18 industries surveyed by the ISM reported overall growth. Separately, the National Association of Realtors reported that its index of pending home sales rose to a level of 114.1 in October, representing the ninth consecutive monthly increase as well as the index’s highest level since March 2006. The rise in pending home sales is being attributed to the first-time home buyers tax credit.

CB: In one of the articles below there is a mention of the FHA increasing the standards on the mortgages it insures. Implementing these stricter standards would decrease the pool of likely buyers and thus hurt or dampen the housing rebound. The weak effects of the stimulus, the eventual removal of the Fed’s support from the housing market, the eventual rise of interest rates, and the potential rising unemployment levels make CB wary of any positive housing news at this time. Yet, CB’s doubts regarding the housing market rebound would have to be revisited if there was a sustained and significant rise in home prices. Such a rise in home prices would offset several of the worst case scenarios for housing, but even a prolonged rise in housing prices might not be enough to help housing sustain headwinds from beyond the industry.

U.S. Car Sales Edged Up in November – The Wall Street Journal

Summary: On Tuesday, automobile manufacturers estimated that they sold roughly 750,000 cars and light trucks in November, an improvement over the 746,789 sold last November. GM and Chrysler project that the annualized November sales equate to 11 million automobiles, which is greater than the annualized sales rate of 10.46 million automobiles in October. However, Ford believes that the annualized November sales equated to 10.5 million automobiles, less than GM and Chrysler’s estimate. Moreover, the auto manufacturers are assuming a modest recovery is underway, but remain cautious on unemployment and consumer confidence. Ford and GM plan to increase their first-quarter vehicle production 58% and 75%, respectively, from this year’s first-quarter production.

CB:

By rounding the estimated vehicle sales to 750,000 the article makes the increase from last year’s November sales appear much greater than the actual figure, which is shown in the above chart. Basically, car sales were stable in November compared to last year, while YTD sales for 2009 remain 23.9% less than they were in 2008. Moreover, given the fragile state of the economy, CB does not believe it wise for GM and Ford to significantly increase their first-quarter production. If the economy does double-dip, or does not recover at the speed these auto manufacturers are assuming, then they put their the sustainability of their recoveries in jeopardy. Holding on to unsold inventory does not help either Ford or GM, and also manages to reduce each companies’ available working capital leading to potential increased weakness for these highly levered companies.

Gold’s Run Pushes Barrick to Cash In – The Wall Street Journal

Summary: On Tuesday, Barrick Gold Corp, the world’s largest producer of gold, accelerated its plans to eliminate the hedges protecting the company against a decline in gold prices. Barrick’s action helped fuel the rise in gold prices for the day, which closed at $1,199.10 an ounce. As a result, without the hedges in place and stable operational costs, Barrick is positioned to maximize its profit margins and cash flow for the near future. Furthermore, the higher prices of gold allow Barrick to: (1) mine lower-quality ore, which is economical at higher prices; and (2) extend the lives of its current mines, while acquiring new ones. Consequently, higher gold prices enable Barrick to recognize more gold reserves in their filings, thus adding value to the company. Yet, some market participants believe that gold may have trouble sustaining its high prices in the near term due to the significant reduction in gold hedges. In recent years, the act of eliminating hedges provided a boost to gold prices, thus with most hedges already eliminated the market cannot rely on large miners eliminating hedges to support gold’s price.

Big Utility to Close 11 Plants Using Coal – The New York Times

Summary: In an effort to reduce carbon dioxide emissions ahead of potential regulation, Progress Energy, a large southern utility based in Raleigh, announced that it would close 30% of its North Carolina coal-fired power plants by 2017. These power plants account for roughly 1,500 megawatts of capacity. Progress is also planning to build a new gas-fired plant, while planning to build two nuclear reactors in both North Carolina and Florida. Basically, the company plans to use more natural gas in the near-term as it builds a nuclear backbone for the future.

BoJ Offers Banks Cheap Loans – Financial Times

Summary: On Tuesday, the Bank of Japan announced that it intends to firmly support the recovery of Japan’s economy with monetary policy easing in the form of offering $115 billion of three-month loans at .1% interest to commercial banks. This action is intended to prevent a liquidity shortage amongst financial institutions. Yet, market participants were disappointed by the action and believed that it does little to solve the reduce deflation and increase growth. Instead, popular opinion believes that the action was done to appease the new Democratic party-led government.

OPEC Output Rises with Oil – The Wall Street Journal

Summary: According to a Dow Jones Newswires survey of analysts and traders, the Organization of Petroleum Exporting Countries’ (“OPEC”) oil production has reached its highest level in nearly a year as the cartel also produces roughly 1.8 million barrels a day more than its formal production target. OPEC’s increased output is primarily due to: (1) the belief amongst members that the China-led economic recovery will increase oil demand; (2) the rise in the price of oil; and (3) some members ignoring their quotas and producing more oil in an attempt to overcome their financial difficulties. Furthermore, the 77% rally in the prices of oil are believed to be the result of: (1) expectation of a global recovery and (2) the weaker dollar.

FHA to Toughen Rules for Borrowers – The Washington Post

Summary: In an attempt to stabilize its finances and continue to reduce its risk, the Federal Housing Agency (“FHA”) is proposing the following changes to policies governing the mortgages it insures: (1) an increase in the minimum credit scores a borrower must have to receive an FHA-backed mortgage, which is currently 500 out of a possible 850; (2) limits on the amount of money sellers are able to kick in, which is currently 6% of the home’s value; and (3) an increase in the minimum down payment and the up-front premium, which are currently 3.5% and 1.75% of the home’s value – respectively. These policy changes are aimed at increasing the amount borrowers have invested in their homes, thus deterring them from defaulting on their loans and walking away from their obligations. At present the FHA backs nearly 30% of all home purchase loans and 20% of the refinancings.

More Links of Note

Anadarko CEO to be a Big Spender – The Wall Street Journal

Double Dip Warning – Paul Krugman

The Bank Job – Vanity Fair

United Nations’ Clean Development Mechanism – FT.com

The Bank Profit Mirage – PragCap

Posen Poses a Question and Fails to Answer it (Interest Rates vs. Bubbles) – Money Supply

European Banks Growing Bigger ‘Sowing the Seeds’ of the Next Crisis – Bloomberg

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