Merrill over Matter

Friday, April 29, 2016

Never bet against The Chanos

Never bet against The Chanos

That may sound like an odd commandment, but it's a good one. I speak of Jim Chanos, the well known short seller. Speaking highly of a member of such a profession may raise the hackles of some individuals, as well as governments, but I have been following his public pronouncements for quite a while and he may be early, but very rarely wrong. Post the great recession of 2008-2009 he was one of the first to warn about the construction & credit bubbles percolating in China; and while ridiculed for it his warnings have played out.

I even have a google alert on "Jim Chanos" (along with quite a few others) so as to catch everything he talks about. Recently I got a hit on a great 90+ minute podcast he did with FT Alphaville.

Podcast: Jim Chanos on the art of short-selling

I suggest you listen to all of it.

Monday, April 18, 2016

Hugh Hendry talking macro and China

It's been a while since I've mentioned Hugh Hendry but he's popped back up on YouTube recently. After his positively raucous returns in the depth of the crisis he had a long period of very underwhelming returns and from his manner in this broadcast I'd guess a tough few years.

ft.com describes the decline in assets under management in 2014

As always I find him entertaining to watch. He provides some of the reasons for his reversal of opinion on China as well. Regardless whether you agree with him or not I suggest you listen.

source: http://www.macrobusiness.com.au/2016/04/hugh-hendrys-long-dark-night-of-the-soul/

Wednesday, March 9, 2016

US Coal - brutal fallout from low natural gas prices

I've recently posted on the drop in natural gas and oil prices, but I haven't commented much on the knock on effects. A brutal example is the destruction of coal companies in the US. Train car loadings of coal have completely fallen off a cliff, caught fire, and remain a smouldering ruin.

Look at some of the stock symbols for coal companies and you'll see declines even more severe. Here's BTU (Peabody Energy)

Low natural gas prices are encouraging a switch from coal to natural gas electricity generation

source: http://www.eia.gov/electricity/monthly/update/resource_use.cfm#tabs_con-3

It is not a good time to be in the coal business

disclosure: No positions, either long or short.

Friday, March 4, 2016

Free delayed quotes and a plethora of other financial data

If you are looking to import quotes into an excel spreadsheet, I haven't found anything else as convenient or extensive. It can take you a while to get up to speed on the data available but it is worth it. The range of data available, for free, is mind boggling.

http://ogres-crypt.com/SMF/

http://ogres-crypt.com/SMF/Tips-and-FAQs/

Here's just a sample of the data available from the Yahoo feed:

Basic Quote		Fundamentals		Technicals		Estimates		Real-Time (ECN)
Code	Description	Code	Description	Code	Description	Code	Description	Code	Description
s	Symbol	j1	Market Capitalization	a2	Average Daily Volume	t8	1yr Target Price	k1	Last Trade (ECN with Time)
n	Name	f6	Float Shares	t7	Ticker Trend	e9	EPS Est. Next Quarter	b3	Bid (ECN)
p	Previous Close	r5	PEG Ratio	j	52-week Low	e7	EPS Est. Current Yr	b2	Ask (ECN)
o	Open	p5	Price/Sales	j5	Change From 52-week Low	e8	EPS Est. Next Year	c6	Change (ECN)
h	High	p6	Price/Book	j6	Pct Chg From 52-week Low	r6	Price/EPS Est. Current Yr	w4	Day's Value Change (ECN)
g	Low	b4	Book Value	k	52-week High	r7	Price/EPS Est. Next Yr	c8	After Hours Change (ECN)
x	Exchange	r	P/E Ratio	k4	Change From 52-week High			j3	Market Cap (ECN)
l1	Last Trade (Price Only)	e	Earnings/Share	k5	Pct Chg From 52-week High			r2	P/E (ECN)
l	Last Trade (With Time)	j4	EBITDA	m3	50-day Moving Avg			k2	Change & Percent (ECN)
d1	Date of Last Trade	s7	Short Ratio	m7	Change From 50-day Moving Avg			v7	Holdings Value (ECN)
t1	Time of Last Trade	d	Dividend/Share	m8	Pct Chg From 50-day Moving Avg			g5	Holdings Gain & Percent (ECN)
k3	Last Trade Size	y	Dividend Yield	m4	200-day Moving Avg			g6	Holdings Gain (ECN)
c1	Change	r1	Dividend Pay Date	m5	Change From 200-day Moving Avg			m2	Day's Range (ECN)
p2	Percent Change	q	Ex-Dividend Date	m6	Pct Chg From 200-day Moving Avg			i5	Order Book (ECN)
c	Change & Percent
v	Volume	Option Quote Additions
m	Day's Range	Code	Description
j	52-week Low	o1	Open interest?
k	52-week High	p3	Type of option
w	52-week Range	e3	Expiration date
b	Bid	s3	Strike price
b6	Bid Size	n	Name of option
a	Ask
a5	Ask Size

note, the last trade quote is l1 (lowercase 'L' then the number '1') (that drove me nuts for a while)

here's how it looks in my spreadsheet =RCHGetYahooQuotes(+Z2,"l1")

This is only one small segment of the data, The full excel list of all the data points available can be found here: http://ogres-crypt.com/SMF/Elements/ and it is a truly phenominal amount of data. Yes, some of it is repetitive but if you are looking for data on a security, start here.

There's also an active message board if you have any questions on implementation:

https://groups.yahoo.com/neo/groups/smf_addin/info

Of course you can get one cell to refer to another, so one can populate quite a bit of data in a spreadsheet by just entering the symbol. Best part is it's all free.

I use the plug-in almost daily and would honestly be lost without it. I suggest you give it a try as well.

Wednesday, March 2, 2016

Oil's eventual recovery, part two

Before continuing with my posts on oil and energy I'd like to call out two excellent sources of information. I've used both in my research and while I attempt to source everything sometimes bits of it slips through into the zeitgeist of my ideas and isn't directly referenced.

http://soberlook.com/ and more specifically his Daily shot email list is an excellent publication on the current financial markets. He is also on twitter at @SoberLook

John Kemp is an energy market journalist at Reuters. He also provides frequent emails specifically on the energy markets. Email him at john.kemp@thomsonreuters.com and request to be added to his email list. He is also on twitter at @JKempEnergy

Ok, back to it....

In my earlier communication I discussed some possible reasons why oil prices dropped so dramatically. Now we'll consider why they will rise, eventually. I'll keep this one 'bullish' and save the horrifically bearish counterpoints for the next installment.

There's a common pithy statement which is the theme of this post -- The solution for low prices is low prices

Low prices encourages demand

The economy has not roared back to life in the last 12 months but the pain at the pump sure has gone down. Lower prices are encouraging people to drive more.

(thanks to @mbusigin - link)

Low prices destroys investment in new supply

Energy extraction is a very capital intensive business and the decline in prices has already reduced investment, either voluntarily or involuntarily

This chart is very instructive in showing how investment (like drilling, see below) in the energy business chases the price.

source: http://www.eia.gov/todayinenergy/detail.cfm?id=23072

As much as 400,000 barrels a day of oil production is at risk as U.S. shale companies like Samson Resources Co. run out of money and are forced to slow drilling.

U.S. Shale Drillers Are Drowning in Debt - Bloomberg

Natural decline in fields

Conventional fields decline around 5% a year; shale fields drop much faster, 50%+ the first year, with the rate of decline lower in later years. Assuming just a 5% decline rate in oil production from current oil fields you need to replace the entire oil production of Canada each year. Yes, there is excess capacity now and new projects coming online, but the dropoff in new field investments will eventually overwhelm that spare capacity.

Drilling rig count continues to plummet, not only in the US but worldwide

New wells require new drilling, and new drilling activity is plummeting. As of October 2015, the year over year percentage decline is a stunning 42% Current data as of 02/8/16 shows this trend continues:

http://www.businessinsider.com/baker-hughes-rig-count-february-19-2016-2

http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother

http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsintl

Comparing drilling rig activity and oil prices one can see how drilling activity 'chases' the oil price. Higher oil prices increases drilling activity and vice versa.

http://www.datagraver.com/case/lowest-number-of-active-oil-and-gas-rigs-in-the-united-states-since-october-1999

thanks to: @MaxCRoser

One must be careful thinking this means a 42% reduction in wells dug or initial flow rate. Drilling rigs have become frightfully effective over the last few years in US / Canada. A recent email from RBN energy provides examples of this stunning increases in total productivity.

https://rbnenergy.com/if-i-could-turn-back-production-how-increasing-natural-gas-output-defies-price-signals

These improvements are at Moore's law level of technology gains in the energy sector. A 428% gain in initial production productivity over four years is stunning. This massive increase in efficiency is something I'll come back to in the next missive.

Political Chaos

Harder to predict but considering the number of countries derive a high percentage of their GDP or federal budget from oil / natural gas revenues, something is bound to break at these prices.

http://www.cnbc.com/2015/12/03/oil-prices-and-budgetsthe-opec-countries-most-at-risk.html

Please click around on the link above and observe how many countries depend upon petroleum products for a very large portion of their revenue, and right now they are hurting! Some have a massive kitty to draw upon but the rest, not so much.

Here's a quick rundown of a few countries hit by the drop in oil prices.

Venezuela - a horrid situation made worse by the drop in petroleum prices. In my opinion it will be the first domino to fall

Econimic basket case - http://www.bbc.com/news/world-latin-america-34983467

Change in government - http://www.bbc.com/news/world-latin-america-35043945

Economic collapse - https://www.washingtonpost.com/news/wonk/wp/2016/01/29/venezuela-is-on-the-brink-of-a-complete-collapse/

Brazil

Recession - http://www.economist.com/news/americas/21665038-shrinking-once-vibrant-economy-shocking-ordinary-folk-well

Russia

Recession - http://www.wsj.com/articles/world-bank-downgrades-russias-economic-outlook-1443609118

Saudi Arabia

The Saudi's are running out of money.

At a burn rate approaching 100 billion dollars a year they do have a couple of years breathing room, but what about the other OPEC nations? The House of Saud is considering selling bonds to plug the gap, but this only buys them time.

http://www.ft.com/intl/cms/s/2/e9e197fe-3b5d-11e5-8613-07d16aad2152.html#axzz3i9gFuCtc

http://www.telegraph.co.uk/finance/oilprices/11768136/Saudi-Arabia-may-go-broke-before-the-US-oil-industry-buckles.html

While some of the OPEC nations can handle low oil prices for years the majority cannot

Source: The Daily Shot

(Future) Loss of Power

This may be a bit abstract but work with me here for a bit. It may be causing fiscal and political problems at home but right now OPEC, and Saudi Arabia specifically are crushing their competitors and destroying future production prospects in other countries. There just aren't enough projects to make up for the 5+% percent a year decline in the world's oil wells.

Right now the best estimate is OPEC has ~2 million barrels/day of spare capacity.

source: https://www.eia.gov/finance/markets/supply-opec.cfm

Saudi Arabia is the largest OPEC producer and has historically provided quite a bit of swing capacity to modulate the price of oil (see above link for additional details) What happens if perchance OPEC succeeds and is able to completely demolish the US shale business as well as other non-OPEC production and they are running flat out producing oil?

Do they now 'control' the price of oil? NO. They are just like every producer out there, maximizing production. So I ask you in my hypothetical situation: How low would the next president of the United States bow to the king of Saudi Arabia? Without spare capacity Saudi Arabia loses a very important lever of power. In some ways this is analogous to a quote from Dune.

He who can destroy a thing, controls a thing.

Will Saudi Arabia declare victory, reduce production, and regain the ability to raise and lower the price at will?

War

Yemen

The war in Yemen doesn't get as much attention as it should

https://en.wikipedia.org/wiki/Yemeni_Civil_War_(2015)

Syria, Isis, Turkey, Russia, the Kurds, etc

I can't even keep up with all the various sides and their motivations. It's a big fat nasty cruel mess. However, with all the ordnance flying around it could trigger something much much worse and blow up an oil field or two.

The geopolitical struggles of Russia, Iran, and Saudi Arabia are being played out in the energy markets as well on the battlefield. How, when, or if they will eventually set aside enough of their differences to agree to a cut in production is something I cannot predict, but the inevitable decline in current production will inexorably reduce the excess supply in the markets.

Next I'll try to list some of the factors as to why there's so much bearishness in the oil markets today; add it all up and there's not a pleasant looking horizon for oil producers.

Monday, November 16, 2015

Oil's eventual recovery, part one

Right now we are experiencing something which has only happened twice in nearly 30 years, a greater than 50% year over year drop in the price of oil. The previous event happened during the great financial panic of 2008 - 2009. Today the US, China, or Western Europe aren't experiencing a severe recession, so what triggered this dramatic fall? At it's simplest, supply exceeded demand. The how and why is fascinating.

Some quick charts describing the extent of the decline

Year over year percentage change in the price of oil.

Absolute price - Beside the dip to 40 during the great financial crisis, the last time US oil prices flirted with 40 dollars was in 2004.

So what caused the fall? Note the graph below, showing oil production levels of the largest five producers up to 2014. US oil production grew 15.9% from 2014 to 2013 (Source: BP statistical review) and not only was this the largest percentage increase in the world, it was also from one of the largest suppliers in the world. In fact in 2014 the United States pumped more oil than any other country in the entire world. From a nadir in 2005, US production rose nearly 70% by 2014 -- a increase of more than 4.7 million barrels a day. Additionally total world oil production increased by ~2.3% in 2014.

Demand did not keep pace with supply however.

Source: yardeni.com

Note the graph above hasn't shown a decline in world crude oil demand since the great recession; instead supply outstripped demand and prices fell. Saudi Arabia exacerbated the situation by pumping even more oil. (I'll speculate as to WHY later)

Saudi Oil Production

source: moslereconomics.com

Remember all that talk about Peak Oil so many years ago? American oil companies evidently didn't read the articles calling for the death of oil production.

Source: Google Trends

The internet keeps track of almost everything now, so make your predictions carefully.

Even the New York Times piled onto this theme; stating Malthus was eventually right and we'd better get used to it (Peak Oil)

http://www.nytimes.com/2006/11/29/opinion/29homerdixon.html?pagewanted=all

While I may appear to be picking on these predictions, and I am (a little) I would rather highlight how hard it is to make predictions, especially long term forecasts. I will make a few in later missives. Be careful with those.

So how did the US reverse the inevitable decline in oil production? A technique called fracking (aka shale oil or tight oil) altered the cost structure and timing of extracting oil and natural gas from locations previously thought to be uneconomic.

Below is a quick video and some additional links describing the technique:

http://www.eia.gov/todayinenergy/detail.cfm?id=15571

https://en.wikipedia.org/wiki/Tight_oil

https://www.youtube.com/watch?v=VY34PQUiwOQ

Fracking can resonate for some of my readers as an especially dangerous form of petroleum extraction. The linked video is from an oil company, so they will show the process in a positive light without discussing any of the possible downsides. (Such as waste fluids intruding into water aquifers) Google any of the terms and you'll find a strident debate regarding the safety of this new technique.

Regardless of the safety of the process or whether it should be employed at all, fracking and tight oil extraction techniques are currently legal in America and from my reading of the current regulatory climate will remain so. Even a recent EPA report on fracking provides fodder for both sides: https://rbnenergy.com/cmon-gimme-good-water-epa-draft-report-on-hydraulic-fracturing

Fracking allows for the extraction of oil and natural gas from areas previously thought uneconomic. New wells are drilled very quickly and productivity in drilling speed and initial flow rates continue to rise. Specific examples are always illustrative. (source: http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf )

Notice on the upper left image how initial oil flows increased from less than 100 barrels a day to ~800 barrels in the Eagle Ford region (Texas), a greater than x8 increase in productivity! This has catapulted Eagle Ford production to more than 1.2 million barrels a DAY. On its own the Eagle Ford today would be considered one of the top 20 countries in the world for oil production from nearly nothing in 2010. Scroll through the linked report above and you'll see comparable increases in both natural gas and oil for other regions of the country.

One can also see the quick drop off in production for both oil and natural gas since the collapse in energy prices. The rapid decline rate (more on that later) from these new techniques is both a blessing and a curse The game has changed, and OPEC knows it.

This new technology (fracking) has disrupted the oil production regime, creating a new potential avenue of supply not only in America, but the rest of the world. How this new technology changes energy pricing as well as geopolitics is too much for just one post. I'll try to dissect the situation later.