Dead Cat Bounce Friday

Sentiment Watch: Pure panic. Volume accelerated into the close after Paulson spoke about things that are broken and not apparently fixable and Congress decided to bailout, not bailout the auto industry. Someone once said "the market climbs a wall of worry". I'd add that it "abhors taking its cues from government officials holding press conferences." Heck, even a Saudi Prince with a fat wallet gets snubbed by this market. But, since the credit market is really and truly broken and since the weekly economic data looks bleaker and bleaker, what else does the market have to get worked up about, uncertain 4Q earnings? The market is therefore not performing the key function of matching sellers with buyers. Fundamentals simply don't matter. They will again, probably in the next few months, as there is a load of money sitting on the sidelines waiting out the current lunacy. This morning people are in cautious rally mode over a potential sale of Citibank...that sounds like a perfect reason for a sharp and  short-lived bear market rally to me.

Case in point of fundamentals not mattering: Oil fell a whopping 9% yesterday while gas fell 6%. But the energy sectors were tossed overboard.

  • XOI - The big cap, oily stock index: down 11% yesterday. These guys are integrated companies meaning that while they get hurt by lower commodity prices on the upstream side, the downstream portion of their business benefits.
  •  XNG - comprised of a number of E&P stocks, gassier and smaller cap in nature than the XOI: down 15.6% yesterday.
  •  OIH - oil service stocks large and small: down 15.8% yesterday. This is the one that makes the most sense for continued decline although the magnitude of the move is unjustified. Furthermore, it was indescriminate with deepwater falling as much or more as the landbased companies. No matter, I'll buy puts after the next rally here as it looks like the service group is in for a long bout of pain. PE's are cheap but meaningless at this time as prices are going to be coming down as are earnings. Even in the more "fully booked" deepwater names, future contracts will be done at equal or lessor rates than current ones soon. The upward pricing power momentum has been lost.


So What Do I Do Here?  First, not panic. For me the damage is already done. When the wheels come off the train in options investing its time to cut losses where names simply won't come back to strikes which were once near the money but doing so on an upswing will generally result in a better sale as opposed to  a panic sale. Bearing that in mind, we are in a bear market and  there will be multiple instances where the buyers return for short periods. That means I'll be adjusting strikes downward in a limited number of larger cap and/or very solid balance sheet names. Smaller positions and more cash. Shorter hold times as this isn't a normally functioning market.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Natural Gas Review - Bad number
  4. Odds & Ends - PBR

Holdings Watch: The $10KP is at $5,000, with 10% in cash.

  • (EOG): $10KP trade. Sold (10) EOGKQ for $0.15, down 91% to average cost. I think EOG comes back and may even snap back but these have 1 day to go and the strike is unlikely to be achieved.
  • (XOM) $10KP trade - XOM $75 November calls (10) (XOMKO) added for a quick play on today and tomorrow’s trading for $0.63 with the stock at 72.40.

  • XOM - $10KP trade - Sold the November $75 calls (10) for $1.27, up 102%.

  • (EOG) - $10KP trade - Bought (2) EOG $80 December calls (EOGLP) for $5 with the stock down $4 at 72.75.

  • (XOM) - $10KP Trade - Re-purchased (10) XOM $75 November calls for 1.10 with the stock up about $0.50 on the day. Risky and not going to hold for long.

  • (XOM) $10KP Trade - Added another (10) XOM $75 November calls for $0.70.

Commodity Watch:

  • Oil - crude fell just under 9% yesterday, breaching $50 and touching lows not seen since May 2005 as the December contract expired. This morning January oil is trading back above $50 matching a rally in the equity futures.
    • OPEC Watch: Saudi cancels oil service contract for development of the Minefa field, a new field set to add 900,000 bopd by 2011. Saudi will open the contract for rebidding but Manifa may be delayed indefinitely and this is a clear sign that lower prices are going to hurt investment in big, tangible chunks of future production.
    • Nigeria Watch: Rebels attack navy boat defending Shell platform. Not big news but the attacks do seem to be on the rise again.
  • Natural Gas fell $0.43 to $6.32 on a bad EIA storage number and a weak market (see comments next section). This morning gas is trading


Natural Gas Storage Review: Bad Number.

EIA reported an injection of 16 Bcf into storage, bringing us within in a stone's throw of 3.5 Tcf. The number is at first glance perplexing as the weather was the coldest of the season and yet two weeks ago we saw a smaller injection. Or so we thought. EIA revised that number up from 12 to 19 so yesterday's number was in fact the smallest one of the season and quite possibly the last as long as we don't get another unseasonable bout of temperate weather. This week HDDs are forecast to the 150s and the weekend will be bitterly cold over much of the country so I think we have seen the last of the injections.

However, the numbers may be telling us something about current production relative to demand. I say may, and follow me closely here because its important, because weather is not neatly tucked into units of 7 days and neither are the storage numbers. If you look at the last 3 weeks we have cool ends and a warm middle. If the warm middle spread into the other 2 reports (the bookends) then we don't have a problem. But if the number this week, of ---- HDDs was clean so to speak, then gas should really have seen an injection.

  • Extra Supply We Know About Should Not Have Yielded A Significant Injection Given The Weather. We know demand is roughly 5 Bcfgpd high to last year and than imports were about 1.5 Bcfgpd light to last year. So we should have 3.5 Bcfgpd (roughly 24 Bcf per week) of extra gas around. But given the weather, this really should have not been enough to throw another injection of 16 Bcf at us.


  • Next Week's Number Most Telling. As previously stated, temperatures are dipping further this week, meaning there is little warming on the fringe to obscure the next report. We should get a 20 + withdrawal. If we don't there is a problem with demand (probably some credit market impacted industrial demand) and you can say hello to $5 gas.

The gas graphs are included for reference. They really don't paint a picture right now other than to say gas storage is "full" and that injections are running over into the demand season.


Odds & Ends

Analyst Watch:  Keybanki reiterates Buy on (KWK), Jessup cuts (STP) price target from $60 to $9.

PBR Makes Another Subsalt Oil Discovery. Estimated at 1.5 to 2.0 billion barrels in the subsalt and an aggregate 3.5 billion barrels when you add in the heavy oil uphole, this is the latest in a long line of discoveries that the market will not give them credit for as the development capital simply is not available at present. Too bad they are not a company that could be acquired by another Major but Brazil would never allow it. When credit does again begin to flow look for this stock to recover and a multitude of JV development deals to be announced. 

Housekeeping Watch: I'll be out of pocket from 11:30 EST on today at the Haynesville Shale Expo but will monitor the site and may be able to comment via Bird.


77 Responses to “Dead Cat Bounce Friday”

  1. 1
    Sambone Says:

    By Nick Heath

    LONDON (Dow Jones)– Oil futures retraced some of Thursday’s sharp falls
    Friday, led primarily by a rise in Asian and European equity markets and signs
    OPEC is complying with its output cut decision.
    Nymex light, sweet crude oil futures peeped back above the psychologically
    important $50 a barrel Friday as bargain hunting boosted stock markets and
    traders covered short oil positions ahead of the weekend.
    At 1215 GMT, the front-month January Brent contract on London’s ICE futures
    exchange was up $1.26 at $49.34 a barrel.
    The front-month January light, sweet, crude contract on the New York
    Mercantile Exchange was trading 83 cents higher at $50.25 a barrel.
    The ICE’s gasoil contract for December delivery was unchanged at $529.75 a
    metric ton, while Nymex gasoline for December delivery was up 330 points at
    104.00 cents a gallon.
    Analysts said the market’s focus Friday would be on whether Nymex crude prices
    can now hold above that level after closing below it for the first time in
    three and-a-half years Thursday, with another sub-$50 finish opening the door
    to further weakening.
    “It’s been very hard to talk about oil markets without equity markets due to
    the strong correlation between them,” said James Hughes, markets analyst at CMC
    Markets in London. “Dropping below $50 a barrel was the significant level but
    we need to see a sustained move below to get the technical side of it driving
    Crude’s moves higher Friday were against a backdrop of a still bleak global
    economic outlook which continues to threaten future demand and sparks doubts
    about a sustained recovery in prices, analysts said.
    The preliminary estimate of the euro zone’s composite purchasing managers
    index – a measure of economic activity – plunged to its lowest level in more
    than a decade last month, compounding fears of a deep recession in the single
    currency bloc.
    “There are just so many negative powers at work right now that it’s unlikely
    we’ll see some decent support for crude oil or any commodity at this stage,”
    said Walter de Wet, analyst at Standard Bank in Johannesburg. “We’re obviously
    seeing product demand falling rapidly and that should continue well into next
    year.” The move below $50 a barrel has re-ignited speculation surrounding the
    Nov. 29 meeting of Organization of Petroleum Exporting Countries in Cairo. Any
    further falls would likely elicit a production cut, analysts said, although
    there’s no guarantee it would spark a rebound in prices.
    “If we get to back end of next week and we’re still below $50 (a barrel), the
    pressure to announce cuts at next week’s meeting will be overwhelming,” said
    Jim Rintoul, analyst at London-based trade advisory TheOilTrader.com.
    However, signs are emerging that OPEC is adhering to its previously announced
    cuts. The 11 OPEC members subject to output quotas are expected to pump around
    500,000 barrels a day above the group’s target in November but have managed to
    take over 1 million barrels a day out of global markets in the past month,
    tanker tracker Petrologistics said Friday.
    -By Nick Heath, Dow Jones Newswires (Emma Charlton, Joe Parkinson and Spencer Swartz in London contributed to this

    Dow Jones Newswires
    11-21-08 0732ET

  2. 2
    Sambone Says:

    By Isabel Ordonez

    HOUSTON (Dow Jones)–Energy producers are attempting to use lower oil prices
    to grab back negotiating power from oilfield service companies in order to cut
    costs and secure cheaper deals.
    In the past four years, as oil prices skyrocketed, the energy industry saw an
    upswing in global drilling due to the rush of crude oil and natural gas
    companies to build production capacity.
    Some of these companies borrowed heavily to fund their drilling programs. This
    resulted in a shortage of rigs and key technology to evaluate new discoveries
    and enhance oil production from older fields worldwide. Costs of these products
    escalated to unprecedented levels, with rigs in the Gulf of Mexico being rented
    for up to $600,000 a day. This helped the oil and gas service sector gain
    negotiating and pricing leverage.
    But as oil prices has fallen more than 65% from an all-time high in July, and
    several producers have cut their capital spending and drilling programs in
    order to preserve liquidity amid the worsening financial crisis, the oil
    service sector is poised to see an increase in renegotiation of contracts,
    analysts said.
    “Given the correction in oil prices, and what is likely to be a slowdown in
    drilling activity, negotiation power have reversed back to the oil companies,”
    said Bill Herbert, an analyst at Simmons & Co. “We are in the early stages of
    seeing contracts renegotiated on more favorable terms for the oil companies.”
    Shares of some of the largest oil-service companies fell Thursday as crude oil
    settled 7.5% down at $49.62 on the New York Mercantile Exchange. Shares of
    Schlumberger Ltd. (SLB) traded 16.3% down at $39.60, while shares of Transocean
    Inc. (RIG) finished 17.6% down at $55.40.
    Shares of major oil companies also suffered, but to a lesser degree. Exxon
    Mobil’s shared closed Thursday 6.7% down at $68.51 while Chevron Corp.’s (CVX)
    shares finished 8.8% down at $64.40.
    Over the past few weeks, several major oil producers have announced delays of
    important projects, or have scaled back their expansion plans in the hope that
    market conditions will help them secure better deals from contractors.
    State-owned Saudi Arabian Oil Co. (SOI.YY), or Saudi Aramco, the world’s
    largest oil company by production, for example, recently reviewed its
    900,000-barrel-a-day offshore Manifa oil field expansion. This decision could
    affect firms like Halliburton Co. (HAL), the world’s second-largest oilfield
    services company, which won a large three-year contract for that project.
    On Nov. 6, ConocoPhillips (COP), the third-largest U.S energy company by
    market value, and Saudi Aramco officially halted bidding on its
    400,000-barrel-a-day refinery at the Yanbu Industrial City, in Saudi Arabia.
    Both companies cited the uncertainty of the financial markets as the driver of
    the decision, but analysts saw the delay as a move by both firms to wait and
    take advantage of lower operating costs.
    Royal Dutch Shell PLC (RDSA) also recently said the company would defer to an
    unspecified date a decision on whether to expand its Canadian oil-sands
    operation. It said the delay will give overheated costs there time to moderate.
    “I’m sure there are a lot of negotiations going on between oil companies and
    oilfield service companies to reduce prices,” said Sal Ilacqua, an energy
    analyst at Monness Crespi Hardt & Co.
    The first things oil producers are likely to do is defer any projects that
    have yet to be awarded. They might also renegotiate the terms of existing
    contracts so they reflect the dramatic drop in materials, such as steel, which
    is one of the biggest costs of drilling projects, said Kurt Hallead, an
    oilfield services analyst with RBC Capital Markets.
    “The first thing that is going to be renegotiated or delayed will be the
    infrastructure projects,” Hallead said.
    Another approach of oil producers to reduce costs of existing contracts could
    be trying to change the length of contracts. That would allow producers to pay
    the same amount of money to oil service companies, but have the benefit for a
    longer term, Hallead said.

    Deepwater Pressure

    Analysts expect to see more pressure to make changes in U.S. deepwater
    drilling contracts, where rig rates went through the roof.
    “There has never been a cancellation of a deepwater drilling contract, but now
    there are a lot of individuals that are worried that that might happen,”
    Hallead said.
    Asked about the possibility that oilfield service companies’ clients,
    especially in deepwater, will be asked for substantial changes in contracts,
    the chief executive of Transocean said on Nov. 5 that he doesn’t consider it a
    likely scenario.
    “Most of our customers are the big international oil companies who honor their
    contracts,” Transocean Chief Executive Robert Long said. “They have been in
    this business for a long time; they are not going to come and just breach a
    Transocean owns the world’s largest fleet of offshore drilling rigs.
    But even if contracts are honored and renegotiations aren’t productive, the
    near future for oil service companies is gloomier that past years, as oil
    drilling activity is expected to shrink due to lower oil prices.
    “Whether contracts are renegotiated or not, pricing in general for the service
    industry is going to be more of a challenge,” said Simmon’s analyst Bill
    Herbert. “There is not going to be as much work to go around.”
    -By Isabel Ordonez, Dow Jones Newswires

    Dow Jones Newswires
    11-21-08 0738ET

  3. 3
    Sambone Says:

    By Jessica Resnick-Ault
    NEW YORK (Dow Jones)–After slashing multibillion-dollar construction
    projects, independent refiners are looking at ways to trim mere dollars and
    cents from their budgets.
    Faced with declining fuel demand, independent refiners, who buy oil from other
    companies to produce gasoline, diesel, and other fuels, have already canceled
    or postponed some of the largest projects originally planned for 2009, and are
    now trying to reduce day-to-day operating costs. Refiners are installing
    fuel-efficient boilers and returning obsolete rental equipment in an effort to
    reduce costs and maximize their profits.
    The cutbacks are a reaction to the apparent end of several years of profitable
    refining, in which refiners have operated their facilities at optimum rates.
    Refiners’ are shifting their focus from increasing gasoline and diesel output
    to maximizing profitability. These efficiency efforts may result in lower
    volumes of gasoline and diesel production, as refiners hone in on waste at
    their plants.
    Refiners have contended with volatile oil prices, which have soared above $145
    and sunk below $50 a barrel Thursday, while demand for the gasoline and diesel
    they produce has declined. One common measure of refining returns, known as the
    “gasoline crack,” has been negative for a month, without any relief. This
    indicator suggests refiners could have lost an average of about $4 for each
    barrel of crude they have converted to gasoline in the past month. Gasoline
    futures for December settled at $1.007 on Thursday, the lowest-priced gasoline
    contract since February 2004.
    In 2009, refiners are likely to continue to face difficult conditions as new
    capacity begins to operate in India, China and the U.S., with the ability to
    refine an additional 2 million barrels a day of crude oil. These new plants and
    expansion projects are expected to be more efficient than existing refineries,
    putting pressure on refiners with older assets.
    Deutsche Bank called attention to concerns over a weak global market for
    refined products in a report Wednesday, saying that political and corporate
    factors may prevent certain inefficient refineries from shutting down,
    exacerbating the supply glut.
    Still, Deutsche Bank’s refining analyst, Paul Sankey, suggested that there is
    some room for refiners to have fairly positive earnings early in the year if
    crude prices fall rapidly, allowing the companies to turn cheap crude into
    valuable light petroleum products.
    “As the economy keeps declining, demand for gasoline remains relatively low,”
    said Sander Cohan, an analyst with Energy Security Analysis Inc., a consultancy
    based in Wakefield, Mass. While demand for diesel fuel has been a bright spot
    this year, consumption has declined as the European economy has slowed and
    industrial demand has weakened.
    As a result, the market for independent refiners’ products is diminished. “It
    makes sense that they’re going through the balance sheet with a fine tooth
    comb,” Cohan said.
    Perhaps the most dramatic efforts have been undertaken at Sunoco Inc. (SUN).
    Under a new chief executive, the second-largest U.S. independent refiner by
    capacity has retained consultants McKinsey & Co. and launched an internal
    review of its operations.
    The largest U.S. refiner, Valero Energy Corp. (VLO), plans to spend $1 billion
    to improve operating efficiency at its refineries between 2007 and 2012, and
    Tesoro Corp. (TSO) also launched an efficiency initiative last year.

    Pumping Savings

    Equipment dealers who provide refiners with industrial supplies say they have
    noticed a change in their customers’ approach.
    At Godwin Pumps, a New Jersey-based company that rents and sells water pumps
    and related products to clients including all of the East Coast refineries,
    refiners’ cutbacks became most evident in early November. Godwin serves plants
    ranging from Western Refining Inc.’s (WNR) small Yorktown, Va., refinery to
    Valero’s large Delaware City, Del., refinery. The efforts to trim budgets came
    as refiners announced third-quarter earnings. While many were profitable, each
    expressed concern about the future.
    “Refiners started cutting back, pretty drastically, all of the sudden,” said
    Charles Heintz, Godwin Pumps’ manager for sales and rentals in the North East.
    The company has helped Sunoco evaluate how to reduce its costs for pump
    rentals. Sunoco will now buy at least six pumps that it has rented for a few
    years, Heintz said, reducing its monthly rental costs. Pumps are an essential
    component of refineries, helping to move liquids through the complex piping
    systems that connect process units to one another.
    Industrial companies are looking at their costs with a critical eye, carefully
    reviewing whether each rental component is needed, he said. While some of those
    rental pumps are being purchased, others are being returned. Because some of
    these pumps serve an ongoing use in refineries, it’s more economical for
    companies to buy them outright, rather than to pay recurring rental fees.
    While Sunoco spokesman Thomas Golembeski declined to comment on specific
    equipment decisions, he said the cutbacks showed a shift away from producing
    maximum volumes of fuel, and toward operating as efficiently as possible.
    “Now that the market has changed, and the outlook is different, we’ve shifted
    our focus and we’re looking at our costs,” said Golembeski.

    Long-Term Efforts

    Dealers who sell energy-saving equipment have also seen a change in clients’
    preferences. San Antonio, Texas-based Valero has purchased new high-efficiency
    boilers to cut its fuel consumption and reduce its operating costs. Boilers,
    which are used throughout refineries, are an essential component, producing
    steam that is needed for units to operate.
    Valero announced in 2007 that it planned to invest $1 billion in operating
    efficiencies. The effort to reduce its spending was stepped up this summer,
    when CEO Bill Klesse rolled out a program to standardize procedures across
    Valero’s 15 plants, which were acquired from various competitors as the company
    “We realized we’ve got to take this collection of refineries and integrate
    them into a management system of uniform expectations, measures and standards
    as well as continuous improvements,” said Rich Marcogliese, Valero’s chief
    operating officer.
    Marcogliese said the effort was intended to be a long-term initiative that
    would withstand the ebbs and flows of refining profits.
    -By Jessica Resnick-Ault, Dow Jones Newswires

    Dow Jones Newswires
    11-21-08 0737ET

  4. 4
    Sambone Says:

    China’s Oil Price Challenge


    Beijing is gearing up for a major reform of its oil price regime. It may not be the boon some of the country’s oil majors are hoping for.

    China’s economic planning agency says it’s developing plans to introduce a fuel tax and change the way domestic fuel prices are set. Currently it mandates a more or less fixed price to which it makes irregular and infrequent changes.

    Recently, China’s government hasn’t followed the sharp drop in international oil priceswith a reduction in the domestic price cap; Credit Suisse estimates Chinese diesel prices are at a 32% premium to the Asian average.

    For now, that’s helping domestic refiners, particularly China Petroleum & Chemical, or Sinopec, Asia’s largest such company by capacity. It imports around 80% of its crude oil needs, so its bottom line took a hammering when world oil prices were far above China’s domestic cap earlier this year. Sinopec’s investors shouldn’t be too sanguine though.

    If Beijing now brings in a fuel tax, it may well do so alongside a cut in domestic retail prices so that the net effect on consumers is minimized.

    In turn, that will mean a fall in the revenue Sinopec receives for every gallon of diesel its sells at the pump. For a company which is only just starting to rebuild — its net profit through the third quarter was down 67% on year, capital expenditure is well behind budget — that’s not good news.

    What Sinopec and China’s other top oil companies more clearly need is a change to the domestic pricing system.

    It’s unrealistic to expect Beijing to let those prices float freely in line with world levels. But a structure which sees more regular adjustments to the cap — as in Taiwan or Thailand — and which allows refiners to maintain a reasonable profit margin, is desirable.

    Even if that’s the eventual result of the current deliberations, good times may not last for the refiners.

    Beijing worries more about inflation — and by extension social stability — than company profits.

    Another sharp surge in world oil prices would surely spur the government to cap prices again, regardless of any new system, as it did with coal prices earlier this year.

    –(Andrew Peaple, a Columnist on Dow Jones’ Heard on the Street team, has been a financial journalist since 2003. Currently based in Beijing he has also covered the U.K. economy and financial services, and is a U.K.-qualified chartered accountant.

  5. 5
    Sambone Says:

    Will OPEC Cheat?


    LONDON — Game theorists will be sharpening their pencils.

    The slide in Brent crude to below $50 a barrel puts oil prices firmly into the zone where OPEC countries worry about their budgets.

    OK, so the estimates of what price member countries need for production to meet government expenditure vary quite considerably. For example, Qatar’s budgetary break-even is calculated at anywhere between around $10 and $60 a barrel, according to a sample of nine forecasters, with an average price of around $32. Iran and Venezuela need prices at around $90 or more.

    But on average, people who follow these things figure OPEC producers cover their government expenditures at some $54 per barrel.

    Which means current prices are bound to be concentrating minds across the cartel.

    Will their response be:

    a) To agree a cut in production in a world of declining demand and hope to make up the drop in volumes with higher prices?

    b) To agree a cut in production to support prices, but then cheat by producing more than their new quota?

    OPEC already announced a 1.5 million barrel production cut last month and ministers from member states are due to meet again later this month.

    The last cut worked so well prices have fallen by around $15 since they were meant to have been implemented at the start of November.

    Why has the market shown such indifference to OPEC’s announcement? Because history and common sense all point to the logic of cheating.

    To begin with non-OPEC producers like Mexico, the U.K. and Russia have every incentive to keep production at a maximum, especially if other countries are bearing the pain of cuts.

    At the same time, there’s more than enough in existing stocks and supply sloshing around to meet waning demand. So the cuts would have to be deep. But worse still, any cuts now would miss much of the northern hemisphere’s winter (and therefore peak demand for heating oil and the like). Which means that they’d only start coming into effect during a seasonal decline in demand. That might achieve some price support, but the quantity cut for the given price effect is likely to be a pretty glum calculation.

    What’s more, history shows OPEC’s measures to be pretty ineffectual. They managed to do very little to control the price bubble earlier this year. Yes, higher prices suit producers. But it would also have suited them not to choke off demand by allowing such a rapid ascent.

    Even more telling, however, was how little OPEC could do to halt the slide in prices during the 1980s. Or, indeed, when prices dropped into single digits in late 1998.

    And while it’s true most producing countries built up large financial reserves when times were good, the size of the cushion they need to weather the bad times is probably smaller than it seems. Massive amounts of boomtime oil revenues were invested into poured concrete, particularly among the Gulf States. The returns on these investments are likely to be, let’s say, disappointing.

    But the difficulties facing the oil producers don’t end there. Much of their surplus they put into developed country bonds, particularly U.S. Treasuries. As their savings shrink, so too will their appetites for sovereign debt — at a time when there will be massive new issues of the stuff. Expect to see yield curves steepening sharply, even as the global recession deepens.

    (Alen Mattich is a senior reporter and has been writing a column on market strategy for seven years.

  6. 6
    BirdsofpreyRcool Says:

    IG 280, after closing last night at 285.

    FNMA +172.7, after closing at +175

    These are not real numbers. These are indications of sentiment. Real numbers in investment-grade bonds would not begin with a “2” and 10-yr gov’t-backed debt (FNMA) should not be trading at 1 3/4% higher than, well, gov’t debt (treasuries). Especially since the 10-yr treasury yield is currently 3.15% (think about that… 3.15% to invest for 10 years!).

    The Flight to Quality was fast and brutal yesterday. Fear and Absence of Confidence remain the themes driving the market bus. The worst damage continues to be focused on financials, where short-term C and GS debt widened 50-75 bps (huge moves in debt… just huge).

    Frightening themes continue to be:
    economic reports depicting a deepening recession
    uncertainty over the bail-out of the D-3
    lack of liquidity (as z points out above, lack of buyers to match sellers)
    deflation fears hitting commodities and other hard assets

    And those are just the highlights.

    Added to the energy sector uncertainty, was the election of Henry Waxman to chair the House committee on energy (and more). Waxman will push for more fuel efficiency from the D-3, but his energy policy is about as far left as one can go. In replacing the old committee chair, Dingell, it is the triumph of Hollywood (Waxman) over Detroit (Dingell). Nothing political in these statements. I refer you to today’s WSJ to read about Waxman’s position on carbon-based fuel and “global warming” policy. But, bottom line, a Waxman lead energy policy will push for more taxes and regulations and restrictions on the traditional energy producers (coal can just about forgetaboutit).

    Here’s the good news: Foreign equities rallied and US Treasuries sold off (good) last night, so we have a shot at being positive today. After the drubbing this week has brought, a green day would be a nice way to start the weekend.

  7. 7
    BirdsofpreyRcool Says:

    comments from the CDS trading desk:

    Commercial mortgage-backed securities are rallying a bit today. Credit is following, suggesting that we may rally. Suggesting that it may be worth buying stocks here for a trade as stocks seem to be lagging credit a bit. This is just a day trade.

    caveat: this is from the same trader that thought we might end the day with IG back at 237 (when we actually closed at 285). On the other hand, this trader is usually more right, than he is wrong (which is why I bother passing along his comments).

  8. 8
    zman Says:

    Thanks for the credit comments Bird.

    Nice opening, need to see a lot more of that otherwise its just a day trade, as you say.

  9. 9
    Sambone Says:

    By Brian Baskin

    NEW YORK (Dow Jones)–Crude oil futures rose Friday as global equities markets
    Light, sweet crude for January delivery traded 46 cents, or 1%, higher at
    $49.88 a barrel on the New York Mercantile Exchange. The January contract is in
    its first day as the front month, and is up 26 cents from the expiration price
    of the December contract. Brent crude on the ICE futures exchange traded 89
    cents higher at $48.97 a barrel.
    Crude futures staged a slight rebound after sinking to $48.25 a barrel, a new
    3.5-year low, inching higher after five sessions of near-constant declines.
    Equities continue to guide commodities markets, which have turned to stocks as
    a predictor for the global economy. U.S. stock futures are higher, indicating
    that the market may take a break after plunging to nearly 7,500 on Thursday.
    “A lot of people are exhausted, in the sense that the market has taken the
    bath that it’s taken, and everybody’s hoping for some kind of recovery,” said
    Tony Rosado, a broker with GA Global Markets in New York.
    Rosado and others described any gains made Friday as fragile. The economic
    downturn shows little sign of relenting, and Citigroup Inc. (C) is reportedly
    looking to sell part or all of its assets, in a sign that the financial sector
    crisis is not over.
    “This strength doesn’t look convincing,” wrote Jim Ritterbusch of the trading
    advisory firm Ritterbusch & Assoc. in Galena, Ill.
    The oil market is beginning to see some support from a production cut by the
    Organization of Petroleum Exporting Countries, however. OPEC members have taken
    1 million barrels a day of production off the market, according to
    Petrologistics, a tanker tracking service. That’s less than the promised 1.5
    million-barrel-a-day cut, but a higher degree of compliance than many had
    Front-month December reformulated gasoline blendstock, or RBOB, recently
    traded up 2.50 cents, or 2.5%, at $1.0320 a gallon. December heating oil traded
    2.89 cents, or 1.7%, higher at $1.7048 a gallon.

    -By Brian Baskin, Dow Jones Newswires

    Dow Jones Newswires
    11-21-08 0928ET

  10. 10
    zman Says:

    Thanks Sambone. Good to see OPEC cut numbers being confirmed by one of the tanker tracking companies. The shorts, and that includes your buddie at Alaron, have said OPEC is not cutting despite their statement of cut several times. Everything I saw including data from another tanker tracker firm is to the contrary, that OPEC production is falling.

  11. 11
    zman Says:

    But even as I type that, oil givens back all of the morning’s gains. Majors and indie refiners should like that as products are doing well with gasoline actually leading heating oil up.

    Agree with Ritterusch in 9 that the strength does not look convincing. (EOG up 2 after falling 12 yesterday, come on!)

  12. 12
    BirdsofpreyRcool Says:

    HK seems to be under attack… CHK is up 7% while HK is down 12%. Other than “someone wants out” is there any reason for the attack?

  13. 13
    zman Says:

    ZTRADE: Out (20) XOM November $75 Calls for $0.13, down 85%.

  14. 14
    zman Says:

    Bird – No, I’m watching it too. Volumes are pretty light again for most of the E&Ps. HK looks like it had a good sized seller into that strength this morning. I though about it for a trade but I’m leaving in a bit. Also, goes against my current thinking on the group. Choose safe names or you’ll be sorry. And then maybe still sorry. I’d much rather add to longer dated XOM or EOG calls here.

    I do have an “Armegedon won’t happen” basket that I’m going to buy calls and stock in week after next. Names in there right now are HK, SD, DNR, KWK, PQ, BEXP. Also finally going to take a shot at GDP.

  15. 15
    rlogan1301 Says:

    just got stopped out of SU…bought at 18 out at 15…

  16. 16
    zman Says:

    RL – just shockingly bad performance in the group. The trick is not to get killed during these times. Next week I will be reordering the $10KP, not trying to make money with the current strikes as we have had a sea change in the last day that takes many of them out of play, making them grinders into the next expiration. Even with good performance in the stocks the market will have to put on an uncharacteristically strong showing.

  17. 17
    BirdsofpreyRcool Says:

    IG 279 rally in credit fading

    FNMA 10s 173.7

  18. 18
    zman Says:

    ZTRADE: $10KP XOM Dec $75 Calls (XOMLO) added for $3.30.

  19. 19
    zman Says:

    Would someone please post market and commodity numbers periodically after 11 EST? I would appreciate it.

  20. 20
    1520sbroad Says:

    Bird – to follow up on conversation from the other night – spoke to the guys i know at C again several times yesterday and early this morning. Not good. They all think there will be a different name on the door soon. Apparently support staff at the SmithBarney level was given the “it’s business as usual even if there is a new owner” speech after the close last night. Interestingly this wasn’t told to SmithBarney financial advisors/brokers at the same time – resulted in complete chaos and catastrophy plans being put into action by brokers.

    There was also another call yesterday midday about the SIV take in we were talking about the other night. After the call everyone was even more confused about why C did what they did. Hmmm…

  21. 21
    VTZ Says:

    gold through 780, key barrier…

  22. 22
    VTZ Says:

    If gold closes above 780 thats extremely bullish

  23. 23
    BirdsofpreyRcool Says:

    1520 – thank you for the update. Having sat through the “it’s business as usual even if there is a new owner” speech myself at a financial institution, i feel qualified to bark an unqualified BULLSH*T! to that statement.

    Sad days in financial services. And it ain’t over.

  24. 24
    BirdsofpreyRcool Says:

    This article made the rounds on Wall Street last week… I am finally getting around to reading it now. Every person who ever invested a dime in a security should read this (if you haven’t already). It also happens to be written by one of the best financial writers out there, so it’s an easy read.

    Michael Lewis’s take on financial history:


  25. 25
    Sambone Says:

    Another yield whore play. It is spectulation, but I think that Hank and Ben won’t let “C” fail. See WB, before they got finally bght by WFC. Ok, here ya go;

    Buy CprG/Yahoo C-PG (Citigroup Capital Trust XX). 7.875% at par ($25.00). Pays a coupon of $1.96875 per share. It is Cummlative. Buy at $11.00 or under. At $11.00 that is a current yield of 17.89%. It is callable in 12/15/12. Once again the risk is that “C” will close the doors and Suzie the teller will turn out the lights. So they call me in 2012. That is a total return of 49.6% annualitized.

  26. 26
    zman Says:

    For those going to the Expo who want a free brew at the Horseshoe tonight I can be reached via email or instant message to 501-766-2215. My wife suggested after my recent performance that I just paint a target on my back so you guys could find me but she’s hormonal so I’ll pass on that one. Have a better one.

  27. 27
    Fiveanddimer Says:

    VTZ — don’t know if you are familiar with Richard Russell’s work. He has written the Dow Theory Letter since 1957. For decades he scoffed at the notion that the gold market could be manipulated. Lately, however, he has changed his mind. He recently said he thought someone was capping gold at the 770 level. I see it has traded as high as 795 today. That would mean that if Russell is right, the resistance has been broken and that the “bad guys” will have to retreat and draw another line in the sand at a higher price. Personally, I have no idea whether the gold market is manipulated. I won’t rule it out, however.

  28. 28
    1520sbroad Says:

    Sambone – #25 – I bought one of the MER preferreds earlier this year with the same type of setup. I do not think C turns out any lights, maybe becomes part of someone else but even in that case i think the preferreds continue to pay. there are a ton of these crazy yield plays out there. some won’t pan out but i think the vast majority will.

  29. 29
    VTZ Says:

    I do think that the gold market is manipulated as a result of reading many, many articles and papers on it. 750 and 780 have been defending with fierce selling even during situations where there would be no fundamental reason to sell and during many occasions where there is extremely dollar negative news.

  30. 30
    1520sbroad Says:

    Speaking of yield plays – VLO at $15 has a yield of 4.0%. I’ll take that over a 10 yr any day.

  31. 31
    Fiveanddimer Says:

    By the way, Richard Russell’s current asset allocation: 80% cash and 20% physical gold. He thinks this bear market could still get a lot uglier.

  32. 32
    douglas51 Says:

    I had dinner with Louis Navellier last evening in Atlanta and he thought the mkt would bottom ny next week…I hope is correct.

    Said a lot of his hedge fund friends are just wiped out. Palm Beach homes for quick sale.

  33. 33
    BirdsofpreyRcool Says:

    no recent quotes on the IG (last seen back at 280), but FNMA is better:

    FNMA 169.4 -5.5

    However (and there always seems to be a “however” these days)… the credit bear raid of the last two weeks has shifted out of FNMA/FRE and into corporate bonds. So, any relief we feel from seeing an improvement in Fannie and Freddie bonds is offset by a continued deterioration in the corporate bond market. This is just one of the reasons why trying to follow what is going on in credit is so tough. First it was the TED Spread blowing out… it fell back to earth somewhat, but that didn’t mean credit got better. Then it was the commercial paper market acting better… until you figured out the govt was buying ever more and more there. Then it was some corporate bonds getting issued… until you looked at the price and concluded it told you things were not better, but worse. Then it was the raid on the gov’t-backed Fannie and Freddie (a relative-value benchmark against which corporate bonds are priced). Now it is the full frontal assault on corporate bonds. This is only partially captured by watching the IG index… but, what that index is telling us is: stocks are going to go lower.

    Doesn’t mean we don’t have some wicked-fun, short-term rallies. But, take profits when you can get ’em.

  34. 34
    ram Says:

    JAN CL 49.10
    DOW 7647 +94
    S&P 762 +9

  35. 35
    ram Says:

    XOM 71.27 +2.76

  36. 36
    ram Says:

    ZMAN – I thought you’d get a kick out of this: CITI CEO Vikram Pandit has blamed “rumor mongering” for the collapse of its stock price.

  37. 37
    ram Says:

    Hey BOP, I am about to turn all assets into cash and hide in a cave after reading that article.

  38. 38
    BirdsofpreyRcool Says:

    ram – seems like most of the damage has already been done. ??. but, having cash on the sidelines is a good idea. I think we will have lots of oppys to buy “stupid cheap” over the next several months. Just not sure you can “buy-and-hold” yet.

  39. 39
    BirdsofpreyRcool Says:

    ram – what in particular struck you about the Michael Lewis article? That bankers lie? That wall street isn’t the brain trust we thought it was? That you could take sh*t “assets” and turn them into 35x sh*t assets… and STILL find buyers?

    except for the 35x leveraged part, not a lot about Wall Street has changed, over the last 20 yrs.

  40. 40
    orion Says:

    CNBC hyping $25 crude, brainless fools…
    SUN and EOG making me happier today than yesterday.
    XLF puts for insurance, will add more into the close to protect against C collapsing over the weekend. This market seems too random, like dodging meteorites.

  41. 41
    BirdsofpreyRcool Says:

    nice rebound in some of the e&p high-fliers: KWK, CLR, CRK, CHK. almost forgot what “green” looked like!

  42. 42
    Alhambra Says:

    big put action on BP Nov 40s. gotta love expiration day

  43. 43
    Sambone Says:

    brainless fools, luv it!

  44. 44
    Sambone Says:

    MEXICO CITY (Dow Jones)–Mexican crude oil production fell 9.6% during the
    first ten months of 2008 from the year-ago period to an average of 2.82 million
    barrels a day, state-run Petroleos Mexicanos said Friday.
    Exports slid 17% during the period to an average of 1.4 million barrels a day.
    Overall production was dragged down by a 31% output drop at the country’s
    largest oil field, Cantarell, to 1 million barrels a day during the first ten
    months of this year. In October Cantarell only pumped 902,000 barrels a day,
    said Pemex.
    Pemex said Cantarell has only been partially offset by a 39% rise in
    production at the country’s second largest oil field, Ku-Maloob-Zaap, which
    averaged 690,000 barrels a day during the period.

    -By Peter Millard, Dow Jones Newswires

    Dow Jones Newswires
    11-21-08 1233ET

  45. 45
    ram Says:

    BOP, I agree with the last statement. I just would not have imagined that it would take down the entire investment world. My mom, with how she wraps everything in aluminum foil, is supporting at least half the Alcoa price at $7.

  46. 46
    BirdsofpreyRcool Says:

    ram – i totally agree with you. When i first heard the thesis, in late 2006, that major wall street banks were in danger of going belly up due to subprime lending, I was incredulous. I have seen wall street blow up their clients, but I didn’t think they had sunk so low as to blow themselves up.

    I was wrong. Boy, was I wrong.

  47. 47
    Sambone Says:


    “Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”

    Gordan Gekko – Wallstreet 1987 “Greed is good”

  48. 48
    BirdsofpreyRcool Says:

    LOL… Greed runs wall street. Greed has ALWAYS run wall street. To separate greed from wall street is like trying to separate sunshine from daylight… they just go hand in hand.

    Of course, customer greed is the other side of the wall street trade.

    Greed is neither good, nor bad. It’s like breathing. It’s just what humans do.

  49. 49
    BirdsofpreyRcool Says:

    IG 281 happy bears…

  50. 50
    BirdsofpreyRcool Says:

    sambone – z says “bluehorseshoe loves xom”

  51. 51
    Sambone Says:


    BOP – “I have seen wall street blow up their clients, but I didn’t think they had sunk so low as to blow themselves up.”

    Wallstreet greed = “It came to me, my own, my love… my… preciousssss.” Gollum – The Lord of the Rings: The Fellowshiop of the Ring 2001

  52. 52
    krishna Says:

    How many XOM calls in 10KP did we buy today?

  53. 53
    BirdsofpreyRcool Says:

    FannieMae bonds are seeing a pretty incredible “rally” today. At the same time, corporate bond spreads continue to widen. This is explained by the MacroBears covering their shorts in Fannie and Freddie and moving their bearish bets out the risk curve into corporate bonds.

    The Investment Grade bond index is currently “pricing in” a future default rate of 14%. The High Yield bond index is pricing in a future default rate of 52%. At the depth of the 2001-2003 recession, the high yield default rate topped out around 10% or so. I don’t know what the corporate bond default rate was, but it certainly wasn’t more than 2% (if even that).

  54. 54
    BirdsofpreyRcool Says:

    #51 – point well-made… and well-taken.

  55. 55
    BirdsofpreyRcool Says:

    krishna – z says he bought 2 XOM calls

  56. 56
    Sambone Says:

    You know I have looked and researched and I finally found the great Z-man on You tube;

  57. 57
    1520sbroad Says:

    From GMXR release at about 1pm EST:

    Well results in HS:

    The Callison 9H (100% WI) located in the William Smith a21, Harrison County, Texas has the Company’s shortest planned lateral of 2,200 feet. The well was placed on production November 20th and is currently producing at a stabilized rate of 7.7 mmcf/d, on a 22/64″ choke with 5,200 pounds flowing casing pressure. The completion consisted of an eight stage fracture treatment. “We have budgeted 2009 based on a beginning production rate of 3.4 mmcf/d,” stated Ken Kenworthy, CEO of the Company.

  58. 58
    occam Says:

    A comment about the “Gas in Storage” table above.

    5 year average at this point is shown as 3348. However, the low was 2654, set 5 years ago. This low will drop off in January. The year 5 years ago was an outlier (very low minimum in spring, very low maximum in the fall).

    The average over the last 4 years is 3521, which is above the current level of 3488. Storage will compare favorably with the 5 year average (for NG investors) starting in January.

  59. 59
    ram Says:

    SAMB – Since you seem to be the most wise in this community, I’ll believe the post in #56. Although I thought ZMAN was not that aggressive.

  60. 60
    BirdsofpreyRcool Says:

    z says – That’s a nice rate on that short lateral at gmxr, good for them and gdp in area. Hk still ruling in the hs in terms of “big” wells

  61. 61
    kyleandy Says:

    56 good find sam

  62. 62
    ram Says:

    DOW 7533 -20
    S&P 751 -1
    XOM 70.56 +2.05

  63. 63
    1520sbroad Says:

    #60 – that’s what i thought. I am curious what it cost them to drill/complete that. No mention of costs in the release. My hope would be that the geology/engineering discovery period in the HS is going to be as rewarding as it has been in other plays in spite of big changes in CAPEX/ gas pricing.

  64. 64
    rlogan1301 Says:

    when is the next big news items for NG? UNG up about 2% and was wondering if there is still catalyst for this to go higher.

  65. 65
    BirdsofpreyRcool Says:

    RL – z says: next thursday is an important day for ng

  66. 66
    Sambone Says:

    It’s Friday after a brutal week. Ya know all I want is this thing to end in 1 1/2 hours. Nothing better than watching portfolios melt like the “Wicked Witch of the West”. AAPL at 80, no debt some sales and 20 Bil in cash. Big MO under 15 with a 8+% yield. Ya, I want to be Whitey too.

  67. 67
    BirdsofpreyRcool Says:

    sambone – yep. brutal week. relax a little with this one (as we contemplate what’s going to bite the mrkt next):

  68. 68
    1520sbroad Says:

    C = $3.10 Wow.

  69. 69
    ram Says:

    CHK 15.39 +1.41
    DNE 0.250 -0.109
    PQ 4.90 +0.20
    BEXP 2.38 -0.30
    HK 12.42 -0.53
    XOM 71.22 +2.71 (3.96%)

    DOW 7567 +15
    S&P 753 +1

  70. 70
    rlogan1301 Says:


  71. 71
    BirdsofpreyRcool Says:

    RL – thanks for the head’s up. It’s a good choice at this point in time.

  72. 72
    orion Says:

    SUN +17%, nice..

  73. 73
    ram Says:

    S&P 500 785.30 +32.86
    Dow 7,906.64 +354.35
    XOM 74.93 +6.42

  74. 74
    Popeye Says:

    CHK +20%, at least HK went green.

  75. 75
    mahout Says:

    Sam and BOP,

    I GREEDILY grabbed some HK at 13.10 today. ‘Don’t believe it will go belly up. Will hold for the tender offer or if none, for the long pull. May buy some more.

  76. 76
    BirdsofpreyRcool Says:

    mahout – my fav stock! glad you grabbed. I saw the 11-handle and just about went nuts (no avail cash today). I wish you all the best (but i hope it dips back down, intraday, so i can join you).

  77. 77
    tbone Says:

    Something of interest..

    The case for buying oil stocks
    Investor Daily: Even with gas prices in free fall and the global economy sputtering, now may be the time to bulk up on oil shares (if you dare).
    By Brian O’Keefe, senior editor
    Last Updated: November 21, 2008: 7:26 AM ET
    NEW YORK (Fortune) — Last week, the Paris-based International Energy Agency released its World Energy Outlook 2008 – a 578-page book full of future supply, demand, and price estimates which this year also included an eagerly-awaited study of 800 of the world’s largest oil fields.

    Here’s the executive summary: Buy oil stocks.

    Considering that the price of oil has plummeted from $147 a barrel in early July to below $50 and that the global economic slowdown is putting a major damper on demand, that might not seem like such a good idea. But as the IEA study makes clear, the long-term supply and demand picture for oil continues to favor higher prices. Maybe much higher.

    The report estimates that energy demand will grow 1.6% a year on average through 2030, for a total increase of 45%. To meet that demand, daily oil production will need to rise from today’s level of 85 million barrels to 106 million barrels. The study found high and rising depletion rates at existing oil fields that will make it increasingly hard for new supplies to keep pace. So, the IEA says, the world needs to invest some $26 trillion over the next couple of decades in infrastructure and exploration.

    “Given what we know about the decline rates, just to stay flat [in global oil production] we’d have to add the equivalent of four Saudi Arabias between now and 2030,” said Matt Simmons, chairman of Houston energy investment bank Simmons & Co. International and author of Twilight in the Desert, the 2005 book that argues that even oil-rich Saudi Arabia’s petroleum production might have peaked. “It’s a very, very scary study. It’s hard to argue with the data and it’s ghastly what the data says.”

    Over the next seven years, the IEA predicts that the price of oil will average $100 a barrel, and rise to more than $110 by 2030. “The era of cheap oil is over,” Nobuo Tanaka, the IEA executive director, told reporters at a press conference in London.

    If Tanaka is right, the vicious sell-off in the equity markets over the past couple of months makes this a historically good entry point for investors looking to grab oil-industry bargains.

    One stock to look at is National Oilwell Varco (NOV, Fortune 500), which has fallen 80% from its 52-week high. The Houston company sells drilling rig equipment, provides tools, and offers supply chain services to oil exploration companies around the world. NOV estimates that more than 90% of the mobile offshore rigs and more than half of onshore rigs built in the past two decades use components it manufactured.

    If you can get past National Oilwell Varco’s somewhat goofy name, the stock is extremely attractive at the current price. Not only does it trade at less than four times its earnings for the past twelve months, but NOV’s market cap of $7.5 billion is less than its $12.3 billion in sales over the past four quarters – giving it an inviting price-to-sales ratio of 0.6. It’s also on solid financial ground. The $1.76 billion in cash on its books exceeds its $1.5 billion in long-term debt.

    Unlike its stock, the company’s business has continued to thrive this fall. In the third quarter, National Oilwell Varco’s sales increased 40% over the previous year. New orders worth $2.4 billion brought its total order backlog to a record $11.8 billion. Even if a few contracts get canceled, the company has pretty solid earnings prospects for the next couple of years.

    If the IEA’s vision of the future is close to accurate, NOV should be a big winner over the long run.

    Looking for guidance in navigating these choppy markets? Let us know what topics you’d like us to cover and we’ll try to address your questions in an upcoming Investor Daily. Please note: Fortune cannot give personalized advice on specific investments in your portfolio.

    First Published: November 21, 2008: 4:58 AM ET

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