Crash Test Friday

132 thoughts on “Crash Test Friday”

1. Oil down $4+ now.

   Autos to go see Bush to try to get included in the TARP now.

2. We opened US trading in credit markets at the wide this morning. IG was at 275, +10 from yesterday’s wider close. Fortunately, we’ve tightened from there. Trading was rather active this morning.

   IG 266 +1bps

   HY 72 5/8 (this is the most sensitive index to credit health… we will be quoting this one as often as we can)

3. This market drives me insane

4. BOP – can you give some measurement yard sticks on HY?

   VTZ – roger that. I will post that Oil Sands piece at the close of biz today by the way. I was thinking of adding a multiple table to it but since the estimates for oil prices are too high still I’ll just publish it as you wrote it.

5. As far as new debt issuance, if you ain’t FDIC-backed, step outta the way.

   No new issues to announce. Our bellweather, IO, is still talking about issuing $175mm of B1/BB- bonds through Jefferies. But no price talk yet. Keep your eyes on this one. If it gets done, and at what price, will tell us a lot about the “health” of the market for any issuer other than solid-gold and/or Govt-backed.

6. No bailout and all the associated ramifications that get you to a potential job dislocation of 3 mm plus persons has people flipping through their financial dictionaries from the R word to the D word. There’s never a good time to let these car guys die granted but now, is really not the time.

7. Yeah sure. Lots of the multiples don’t look too nice right now, I don’t think although some of the contractors fall nicely into the infrastructure bucket like Fluor, Jacobs, Stantec and SNC-Lavelin.

8. Merrill’s data base shows that Junk Bond spreads widened yesterday by 26 bps to 2,092. That means that the average below-investment-grade-issuer has to pay almost treasury yields +21% to issue new debt. Clearly, this is not a reasonable price to pay… for practically anyone.

   If companies don’t have to issue debt, they won’t. But watch out for those who do… the market is telling you it is still essentially closed to anything but the highest-rated borrower.

9. Hey Z.

   Quarryman just sent me a message.

   Can you check his account status, he wants to log on and can’t.

10. By Angela Henshall
    Of DOW JONES NEWSWIRES

    LONDON (Dow Jones)–Crude oil futures traded lower in London Friday after a
    bill to bail out the U.S. automotive industry failed to pass through the
    senate, depressing financial markets and fueling an already-pessimistic outlook
    for oil demand.
    A dispute over union wages derailed the plan to loan U.S. car makers at least
    $14 billion, “in tandem with the slightly stronger U.S. dollar sent oil firmly
    down and further developments in the senate will be closely scrutinized by the
    markets,” said Marius Paun, broker at ODL Securities.
    At 1226 GMT, the front-month January Brent contract on London’s ICE futures
    exchange was down $3.07 at $44.32 a barrel.
    The front-month January contract on the New York Mercantile Exchange was
    trading $3.05 lower at $44.94 a barrel.
    The ICE’s gasoil contract for January delivery was down $4.25 at $462 a metric
    ton, while Nymex gasoline for January delivery was 532 points lower at 102.54
    cents a gallon.
    The stalled automotive industry bill saw equities markets sustain heavy
    losses. The U.S. dollar was also lower in Europe, with negative sentiment
    feeding into the energy complex.
    Crude oil futures gained around 10% over the last few trading sessions, but
    these gains were swiftly dissolved Friday as the market resumed selling on
    fears of demand deterioration.
    The correlation of daily returns between oil and equities has increased
    dramatically in the last two months, with S&P 500 futures foretelling the
    direction of Nymex crude trading, said Harry Tchilinguirian senior oil analyst
    at BNP Paribas.
    Another driver Friday was news Goldman Sachs (GS), the bank that had
    previously warned of a spike to $200 a barrel, cut its outlook for West Texas
    Intermediate to $45 a barrel, a 40% downward revision from its previous
    forecast. The bank attributed the major revision to an increasingly gloomy
    outlook for demand.
    Goldman’s prediction fueled talk over where the contract might trade in the
    first quarter of next year, with some traders suggesting prices could sink to
    $30 a barrel.
    In the nearer term, the market looks ahead to next week’s meeting of the
    Organization of Petroleum Exporting Countries in Algeria, Dec. 17. Market
    participants say to a certain extent a cut in production, quotas has already
    been priced in, but it remains unclear to what extent the group will trim
    production whether traders are assuming a rollback of more than 2 million
    barrels a day.
    Gains ahead of the OPEC meeting may be short-lived, and any cut of less than 2
    million barrels a day could lead to a sell-off, said Edward Meir, analyst at MF
    Global. Meir warned OPEC cannot afford to be timid, “as it is dangerously
    behind the demand curve, and has done a poor job of adjusting to the new market
    realities.”
    Meanwhile, a strike by Total SA’s (TOT) French refinery employees over a wage
    dispute is seen as supportive, and could boost products prices in Europe in
    coming days.

    -By Angela Henshall, Dow Jones Newswires

    Dow Jones Newswires
    12-12-08 0749ET

11. By Pratima Desai
    LONDON, Dec 12 (Reuters) – Goldman Sachs GS slashed its
    commodity price forecasts on Friday, citing a collapse in global
    economic growth and demand because of the credit crisis.
    The U.S. bank which earlier this year predicted an oil price
    spike to $200 a barrel now expects to see crude average
    $45 a barrel next year.
    Forecasts for industrial metals aluminium and copper
    traded on the London Metal Exchange were cut
    substantially to $1,410 and $2,950 a tonne next year from $2,310
    and $5,230, respectively.
    “As time goes on, evidence continues to mount that the
    collapse in September and October oil and other commodity demand
    was not only a transient impact of the credit paralysis,”
    Goldman said in a note.
    “But instead a prelude to the wider damage that the sharp
    deterioration in credit conditions has inflicted on economic
    activity around the world.”
    Fears of worse to come for the global economy can be seen in
    the problems of the global auto industry, particularly in the
    United States where the U.S. Senate rejected a bailout of the
    sector under threat of collapse.
    Goldman expects economic activity to bottom in the middle of
    2009 and a return to year-on-year growth in the fourth quarter
    of next year.
    Demand levels have fallen far below restricted supply levels
    and large surpluses will need to be controlled by sharp output
    cuts, fuelled by tumbling prices in the spot market, it said.
    The need to address large surpluses means spot rather than
    long term prices will dominate action next year, Goldman said.
    “In some markets, particularly the industrial-related
    markets, such as steel, petrochemicals, base metals and
    petroleum refining, this process is already under way,” it said.
    “In other markets such as oil and gas the process is only
    just beginning.”

    CONTRASTS
    The intensity of the global credit crunch threatens to push
    oil prices below $40 a barrel in the near term, Goldman said.
    “We now expect oil demand to decline by 1.7 million barrels
    a day in 2009, driven by a 1.0 million barrels a day decline in
    the OECD countries.
    “As inventories reach full storage either further OPEC cuts
    will be required to balance the market or prices will need to
    decline further to force non-OPEC producers to shut-in
    production.”
    To rebalance the oil market, Goldman said an additional 2
    million barrels a day of OPEC supply cuts and 600,000 barrels a
    day reduction from non-OPEC producers will be needed.
    The story for industrial metals also involves larger
    surpluses as prospects for metals-intensive sectors such as
    construction and transport get worse.
    “We believe that fundamentals are strongest for zinc and
    weakest for aluminum, where inventories are set to climb to
    extraordinary levels,” Goldman said.
    Aluminium stocks in London Metal Exchange warehouses at
    above 1.9 million tonnes are at their highest since 1994.
    In contrast, Goldman thinks demand for agricultural products
    will be relatively insulated, even though it has drastically cut
    forecasts for corn and wheat. nLC407434
    “Expected challenges to acreage expansion in the upcoming
    planting seasons, suggests less downside from current levels and
    the potential for a moderate price rebound in late 2009.”
    Global gross domestic product growth would have be outright
    negative in 2009 to see a real fall in demand, the bank said.
    “Further, grain stocks remain at critically low levels, creating
    a much quicker recovery path.”
    In precious metals, Goldman expects investors looking for
    safety from the financial and economic crisis and a weaker
    dollar will boost prices of gold and silver.
    Gold is used by investors as a hedge against financial
    turbulence and as an alternative currency to the dollar.”
    (Additional reporting by Jonathan Leff, Jane Merriman, Julie
    Crust, David Brough and Jan Harvey; editing by James Jukwey)

    Fri Dec 12 14:25:58 2008

12. OK… here’s the thing. After an initial freak-out, the Investment Grade and High Yield indices are taking the volatility in auto-bailout headlines fairly well. This may be a case where credit itself, provides a steadying hand to the equities market today.

13. Sting, thanks was just doing that.

14. 1.7 million barrels a day demand drop!? wow…

15. Always good to have the Sambone back.

    BOP – here’s to hoping you are right. Generally I despise the word “hope” in conjunction with investing / trading but this is how our fearless leaders on the hill make me “feel”. Ugh.

16. V – that is way larger than the EIA who is looking for 0.45 mm bopd drop next year and the IEA who is still looking for a rebound in demand. Goldman goes for extremes to generate trades. That’s not the jaded Z talking, that’s experience. From Super Spike to Super Slump they want to be the end of the pendulum swing hype. Right now they have become irrelevant in oil calls and trading and they are trying to grab that back.

17. z – yeah. I have “Hope is Not an Investment Strategy” embroidered on a pillow. But, that’s what we are reduced to here.

    IG 265 back to where it closed yesterday.

18. Bird- more perverse credit chatter -spoke to the guys i used to work with at citi yesterday. they have clients calling them asking them to put their money market cash into short term treasuries. The client takes the money out of an interest bearing money market (tiny – but something) pays a commission to buy (again small commission but is still cash out the door) short term treasuries that pay 0%. I guess everyone wants to be able to sleep at night? Even if they consistently lose money.

19. Yeah I realize that Goldman overdoes evreything but that is insane… I can’t even get double air miles when I fill up my tank anymore because gas is so cheap!

20. 1520 – you have gone right to the root of the credit freeze. Until normal people feel comfortable enough (or compelled by high yields) to lend to corporate America, our economy (and market) is dead in the water.

    Keep checking in with your colleagues. That is mega-useful info.

21. By Hyun Young Lee
    Of DOW JONES NEWSWIRES

    Crude oil futures slumped Friday after the U.S. carmakers’ deal collapsed in
    the Senate, adding to the litany of gloomy economic weighing on demand.
    However, the prospect that OPEC will agree to a significant supply cut next
    week was preventing even heavier losses, traders said.
    Light, sweet crude for January delivery was down $3.53, or 7.3%, at $44.45 a
    barrel on the New York Mercantile Exchange, after falling as low as $43.32 a
    barrel. Brent crude on the ICE futures exchange was down $3.16 to $44.23 a
    barrel.
    Late Thursday, the U.S. Senate rejected a bill to rescue the Detroit
    automakers, raising fears that General Motors and Chrysler could collapse. Oil
    prices rapidly shed all of Thursday’s gains as a result, in sympathy with
    tumbling stock markets.
    “It looked as if we were starting to see crosswinds push the prices up ahead
    of the OPEC meeting, and maybe the long-overdue correction was afoot,” said
    Gene McGillian, an analyst at brokerage Tradition Energy in Stamford, Conn.
    “But the fact that one or two of the automakers could go bankrupt shows the
    extent of the economic problems…it puts demand right back into focus.”
    However, the OPEC meeting on Dec. 17 in Algeria is keeping some attention on
    supply, with market consensus coalescing around a production cut of 2 million
    barrels a day. This has broadly been priced into the market, which could get a
    near-term boost if the cartel agrees to the cut.
    “Everyone’s looking for 2 million barrels so if we don’t get at least that
    much, it could be viewed as a negative,” said Tom Bentz, a broker at BNP
    Paribas in New York.
    Key support remains around $40.50 a barrel, the low from last week, but prices
    continue to “bonuce around with every economic report,” he added.
    Further pressure is coming from a new report from Goldman Sachs (GS), the
    renowned oil bulls which previously predicted a “superspike” to $200 a barrel.
    The bank has now cut its 2009 price outlook 40% to $45 a barrel and warned
    crude could average $30 a barrel during the first quarter.
    “We think the oil supply-demand balance appears most challenged in 1Q 2009 and
    believe that oil prices will need to drop to below cash cost levels to drive
    forced shut-ins by non-OPEC producers,” analysts led by Hong Kong-based Kelvin
    Koh said in the report.
    “That’s not actually that far away,” Bentz said. “We’ve got support around the
    $40 area…but if we break that, we certainly could go down to those levels.”
    Front-month January reformulated gasoline blendstock, or RBOB, was down 6.44
    cents, or 6%, at $1.0142 a gallon. January heating oil was 6.54 cents lower at
    $1.4412 a gallon.
    -By Hyun Young Lee, Dow Jones Newswires

    Dow Jones Newswires
    12-12-08 0946ET

22. EOG is hurting but not a disaster for the group so far. I’m holding steady for now.

23. Financial ETF, UYG, trying to go green. Lately, when the financials rally, they take the broad market with them.

24. Orion – was looking at how CHK and HK are performing this morning and thinking same. If broad market/group can shrug this off its probably another positive that we are in a equity market bottom phase.

25. BOP, Doug Kass noted that GGP was able to refinance some debt as a reason for the bounce this morning any comment?

26. Rather nasty story out this morning on Reuters on CHK. Basically a compilation of snippets from analysts saying Aubrey has been humbled, that he has a credibility problem, that he’s not to be trusted. Pretty much a hack job with no metrics involved for valuation. Just an FYI.

27. Bird – i keep in close touch with those guys – they are a very valuable read on the market.

28. BOP – you ought to check with your desk on their thoughts on the rest of the day. My sense is we rally tentatively into the green and close green as the TARP comes to the rescue for the autos.

29. z – echoing your comment earlier, here’s an apt observation from the JPMo CDS Trading Desk: “Market is in praying mode, hoping when it should be fearing.”

    Also: Technicals are still in the drivers seat and most of the moves will be random… Credit market fears the rally more than the selloff right now.

30. BOP – agree with 29. You know its bad when you’re siding with the UAW.

31. gaamblor – GGP is a REIT (which I don’t follow). It’s positive that they were able to place about $896mm of mortage loans this morning. They needed the money. They had $58mm of bonds that matured yesterday and $814mm due in 2009… so they had to get this done. As the bonds are mortgaged-backed, I don’t know the collateral package involved. Or the asset coverage it provided.

    It’s the unsecured credit market (which is the majority of the debt that is issued) that will tell us which way the credit wind is blowing. But, no doubt, it’s good to know that GGP was able to roll some of it’s debt. I wouldn’t read a whole lot into it, even though I would like to.

32. z – my main technical trader is off the desk today. Don’t trust anyone else enough to pass along their comments. But, I tend to agree with your forecast as credit seems to be holding in there. Actually seeing high yield tick up a bit.

    HY 72 7/8

33. Market holding its breath while UAW head bashes Corker. Comedy of errors if it were not costing me money.

    Bird – thanks. Can you give a little primer on where HY should be in a normal environment. Can we chart it?

34. BDI +53 to 764. That’s up 3 days in a row.
    TED spread below to 2 to 1.91

    Just a few positive developments to make you feel better.

    Oh yes. Ely, MN -23 this morning.

35. On the topic of positive developments, PVA and COG at edge of green. Other gassy names coming close.

    Re BDI and SEA – group has been discounting some kind of a recovery in transportation. Exports from China are falling now, not sure how much in the way of legs the dry bulks can have with that headwind. Day rates are still below costs.

36. Just want to sound an alert for some (many) of the names that I watch. The opening gap down is being filled. That can be a real bad sign as the price then reverses back in the direction of the open (in this case down). Not saying that it has to sell-off, just saying that I’ve seen this set-up before.

37. Russia says in recession:

    http://biz.yahoo.com/ap/081212/eu_russia_recession.html

    Oil a big factor in this. When you think about whether Medeyev will agree to a significant out put cut look at the price sensitivity involved.

    At 10 mm bopd at $40 oil that comes to $400 mm per day of revenue.

    With a 1 mm bopd cut, you could think this will boost prices to $45.

    9 mm bopd at $45 comes to $405 mm per day. Makes sense to cut a big enough number to boost revenues. 8.5 mm bopd will probably help get oil to $50 which would be $425 mm per day.

38. Thanks Tater – I hear ya on that pattern. Think its up to Treasury now.

39. Back on board now, thanks for the help Z.

    I’m loading up on CHK.

    What do you think of RIG? Do we have to test 45 again before it flies?

    My general credo is that oil will snap back into its natural harmonic range around $75/bbl.

    Assuming you bought into my thoughts, which three oil patch equities should I own?

40. Re 39 –

    I like the CHK here. Valuation is too low from any sort of historical perspective back to $4 gas. I don’t think we fall back into the nether regions of 1999 – 2001 with the $2s and $3s but their hedge protection is very solid. I think the analysts are missing or at best, highly discounting the carried interest they have in the Haynesville.

    Re RIG – I like them and DO and NE. Contract breakage fear was the name of the game for the last 2 months here. Just has not materialized.

    Re 3 names, don’t know what YOU should own but you know what I do and if I had to pick only 3? Well, I’d skip the oil service names for now and take a Major (pick one, any one, the higher the fear factor on the Street, the more I gravitate to XOM, the less, the more I like the cheap but less cash rich names like COP). Then I’d be long E&P. If just 2 names then CHK barely makes the cut. It very much depends on your timeline. I can argue myself out of cash near term saying the Street has them wrong. I do like the EOG quite a bit as it is a mini Exxon from a financial flexibility standpoint but with strong unit volume growth potential. On the smaller side of things, HK for the Haynesville, the Eagle Ford, and the fact that it too is trading too low on assets if not on CFPS.

    On the much smaller side I like the GMXR …highest growth I can find in an E&P, very strong balance sheet. Resource potential is a 10x of their current booked reserves.

    At some point the service names will have over discounted the coming avalanche in the rig count, before it ends, and then it will be time to visit names like NBR, HAL, SLB. I’d like to see how bad land day rates come off in 1Q first however. Maybe I buy back in right before earnings in mid Feb.

41. Stream of Conscienceness “Tutorial” on the Junk Bond Market

    High Yield bonds trade like stocks. They are quoted in dollar amounts, not in spreads (like corporate bonds). Typically, a bond is issued at par, 100, with a stated coupon, payable every 6 months. If the bond trades up, for example, it’s quoted above par, like 102. It if trades down, it falls below par, like 92. Historically, any bond trading below 80 was considered to indicate that the issuing company was “at risk.” GM’s bonds are trading at 16 to 19 this morning.

    Unlike corporate bonds, high yield bonds come with lots and lots of covenants, preventing the issuer from doing a variety of things, based on backward-looking financial metrics. Things like pay a dividend to shareholders, issue debt that is senior and/or secured, sell assets and not use the proceeds to repay bondholders. Corporate bonds typically do not come with these contractual burdens (as corporate bond issuers are typically perceived as bankruptcy-remote). Issuers do not want to put covenants in, so if they are high-grade, they don’t.

    Junk Bond Issuers are not “bad” companies (unless they got to be junk via the “Fallen Angel” route… like GM and friends). A below-investment grade rating just means that the issuer believes their cash flow and/or asset base will support a higher level of debt in their capital structure. The more debt a company can reasonably support, the higher the returns on equity. Like in the old days, when you bought a house and it doubled in value in a year. If you paid 100% cash (100% equity), then your investment doubled. But if you took out an 80% mortage loan, you make something like 5 times your original 20%-down investment.

    Being able to issue debt allows a management team to control more assets than they could if they used 100% equity (just like you can buy a large house). However, equity has no “teeth.” About the most equity can do (if they don’t like the financial direction of the company) is to try to get a seat on the Board of Directors. Debt, on the other hand, has the ability to step in and take over the reigns if a company can’t live up to its contractural promises (at the simplest level, the promise to make interest payments or pricipal payments at the bond’s maturity). Equity can not force a company to go bankrupt. Debt can.

    Some of our favorite companies in energy are junk bond issuers: CHK, BEXP, XCO, NFX, HK, SWN, KWK, RRC, SD… just to name a few. The company’s use of debt has allowed them to build a larger asset base than they could if they only used equity. But, like there is not a lot of “equity cushion” in a 20% downpayment home mortage, the equity value of high yield issuers is very sensitive to changes in value of the asset base and to the cost of financing their mortgage.

    Individual high yield bonds are quoted in dollar prices, as is the high yield index. But the universe of high yield bonds is quoted in spread (like corporate bonds). The best index for this is the old DLJ High Yield Index, now maintained by Credit Suisse. It is updated once a week (Thursdays) and goes back to July 1996. It’s bloomberg ticker is: DLJHSTW . You might be able to find it elsewhere (as it’s quoted on an exchange). A picture is worth 1,000 words…. I will send z a copy of the graph, going back to it’s inception, and hopefully he can post it. Like everything else in credit these days, it is truly eye-poppingly horrible. During “normal” times, the high yield spread is +300 to 400 bps. At the depths of the last recession, the spread was just over 1,100 in October 2002. Just before this whole mess started, spreads reached a historic low around 275 bps.

    Spreads on the DLJ HY index are currently quoted at +1,906 bps. They have never been wider. Ever.

    Enough hot air for now. Please ask any questions you wish. The bond market is not easy to understand in one sitting.

42. Thanks much Bird. Appreciate the color.

    Market holding up well. Gassy stocks tripping green at this hour.

43. CHK’s bonds are currently quoted in the mid-60’s. Unlike the “sub-80” indicator in the past, trading at this level does not indicate that CHK is a high-probability bankruptcy. It just indicates that not enough investors want to buy corporate bonds. Based on where it’s current debt is trading, CHK would have to pay investors almost 14% to refinance it’s “home mortgage.” You can’t afford to buy a house with a 14% mortgage… you certainly can’t run a company that way, for long.

    Just an example, I am not picking on CHK. But, it’s bonds are pretty liquid and widely quoted. So, they are a good bellweather in high yield energy.

44. IG 262 -3bps pretty amazing, considering all the bad news this morning.

45. FBR cut ratings on DO and RIG today. GS also took down RIG to $58 target and cut rating.

46. Z, Any color on when you’ll sell or roll your Dec calls? (Don’t I sound like a conf. call analyst..) I’m hesitant to move today, Tues at the latest I would think…

47. I’m out for an early Friday xmas lunch. Rally the market for me.

48. Orion – exactly my thinking.

    V – will do.

49. weekend blizzard:

    http://www.accuweather.com/news-story.asp?partner=accuweather&traveler=1&article=4

50. weekend blizzard… where? New Orleans??

51. FWIW, S&P just came out and affirmed CHK’s debt ratings at BB for Senior Unsecured. They go on to say that the outlook for CHK’s debt is “stable.” good news.

52. northwest to northern mid-west:

    http://www.accuweather.com/news-seasonal-headlines.asp?partner=accuweather&traveler=0

    whole west turning a lot colder. Should start getting those West region storage numbers to fall off. So far, no movement at all.

53. Anybody here belong to philstockworld.com? If so, please send me an email.

54. at zmanalpha@gmail.com. Thanks. Need help with a little issue.

55. New England ice storm. These are actually a mixed bag for demand as they kill electricity demand.

    http://news.yahoo.com/s/ap/20081212/ap_on_re_us/ice_storm

56. GM cutting 1Q production by 30%

57. To: BOP

    I manage an retail equity fund and do not follow the HY bond market.

    However, I am looking at the following:

    ABX 6.8% of 2015

    Rio Tinto 6.5% of 2018

    FLX 8.25% of 2015.

    Any opinion would be greatly appreciated and anyone else’s thoughts are welcome also.

58. Bird, you really have “Hope is Not an Investment Strategy” embroidered on a pillow?

    Wow.

59. good call on mrkt turning around, z

60. Dman – gives me something comfortable to sit on.

61. douglas – just saw your note. let me take a look and get back to you.

62. Metals as leading indicator for energy update: BHP, SLW & AUY all green & continuing to look like they’ve bottomed.

    X up 4%.

63. Z,

    Excellent analysis and comments in #40. Thanks.

    As to the coming cut in OPEC production, plus the expected cut by Russia:

    Not worth much perhaps, but my opinion is that it will not be enough. I base this on OPEC like a typical bureaucratic organization has remained way behind the curve in a rapidly changing situation. I see them continuing to remain behind the curve with what they will view as a heroic cut. The fact is that the engine of global recession is relentlessly grinding down and is nowhere near ending. By the time these heroic cuts actually take place, the world will be consuming less oil again. Added to this is the crippling effect of the Credit freeze. We are not going anywhere in the economies, the stock markets, or commodity prices until this is unfrozen.
    Therefore, i personally expect the coming cuts to be too little and too late. I think it likely we will see $35 oil and maybe even $30 oil in the first quarter of 2009. I don’t think it is yet time to be aggressively buying, but that time will certainly come.

64. mahout – I hear ya on their cuts. I reiterate my thought that the complexion and coordination with non-OPEC size players will be a must for the cuts to be supportive.

    I also point out that even the largest expected deterioration in growth for next year (1.7 mm bopd by GS this am) is not going to offset the cuts that are in place relative to 2008 full year production plus declines in Mexico, Russia, UK, VZ (likely), Nigeria in 2009. Then we have a plethora of projects being canceled / delayed. That to me says support zone ahead. Do we see $30? Possible but it only will lead to lower production in the areas that couldn’t fight off their declines at $100+ (I’m looking at Mexico squarely on that one) and a lack of growth from the U.S.’s number one supplier Canada.

65. Better after noon so far, let’s see it run up into the close.

    GDP down earlier was such a gift but I failed to act as my temp on this market exactly matched my temp on Washington.

    Nice to see Majors positive and drawing COP above my buy in yesterday.

    Majority of the gas names green now. Don’t get me wrong, not jumping up and down but appreciate the relief.

66. Is anyone here a member of philstockworld.com?

67. I like being a contrarian. There has been a massive amount of global stimulation with more to come. Like the Exxon Valdez, it just doesn’t turn on a dime. However, there are signs that things are getting better with regards to world credit. I believe that we are very close (within) 6 months of seeing global markets start to expand. The market will anticipate this long before it happens.

    All time stupid trade has to be putting your money in TBills, thinking that you are safe. My feeling is that the dollar is going to depreciate significantly from here. So you will not only earn nothing but lose on the value of the dollar.

    Safest place to be is in hard assets: oil, gas, copper, lead, zinc, etc.

68. Z – yeah, strange that Goldman has suddenly forgotten about decline rates. Maybe they got confused & think that decline rates go into a recession as well… i.e. in times of economic drama they make a panicky judgment that all that geology stuff is trumped by economics. In fact, as you say, the reverse is the case as efforts to fight the declines go on hold.

    Still, the question of the actual amount of demand shrinkage/reduced growth obviously matters a lot & I don’t think anyone really knows at this point.

69. Questions for the wrap watch:

    Hit me with your best shot. If I can’t answer it here then I’ll do so for the weekend wrap. I know what I think is important but I want to know what you think is important. Got a question? Ask now. No question is stupid except the one that goes down the elevator shaft at the end of the day so ask away.

70. Just wondering to what you would attribute the difference in price action between EOG and XOM. No fair just pointing to their size.

71. I take it you mean the recent underperformance on the part of EOG?

72. Yes. Not trying to be an ass. I’m having a bit of trouble not buying into the whole “it’s all rigged by the futures playing of the big boys” kind of mindset. Don’t want to think like that because then I’m just a victim and that’s not a productive way to approach making money.

73. Z – I keep thinking that the midget brigade offers some real opportunity to buy some stock & hold for a year or so. But you mentioned yesterday (I think) that some of the midgets will have big trouble next year… care to name the suspects? Also, is that viability issue mainly levered to the commodities…will they all get better if oil/NG gets better?

74. EOG is much gassier in terms of production profile and is nearly all North America (vs XOM’s global nature) based except for gas from Trinidad which is under long term price contracts. EOG had outperformed their large cap peer group (APC, APA, CHK, DVN, XTO) until the last week or so so it may just be a selling of what’s worked. They also are completely unhedged on all that Bakken oil and ate a little crow over that. Rumors were going around that the Bakken players are not economic below $50. EOG said they are profitable at $40 in the play but no one really paid much attention to that.

75. Dman – I’m still working on a SDM piece. That one I will table for a later date coming to a post near you soon. As to commodities rising will it lift all boats, yeah, probably so. However, some of them will be looking at ceiling test writedowns (reserve impairments) at year end as will many of their bigger counterparts. Figuring out which ones will is what is delaying my answer. I’ll be back of the enveloping the math in that piece (probably 2 weeks from now).

76. douglas – i took a quick look at the 3 bonds… all were issued around par (100), all are trading significantly below par now. Two are solidly investment-grade, one is at the high end of the junk bond spectrum. Here are a few comments:

    ABX 6.8% due 2018. Baa1/A- issued 9/08. Currently offered at 89.5, yield to worse of 8.4% (prices from Trace, not off the trading desk). This is a holding company bond and appears to have no claim on operating company assets. I’d have to check further here, to see if there are any cross-default provisions. All else equal, I prefer NOT to be at the HoldCo level… you want to be as close to the assets as possible. In this case you have subsidiary debt and bank debt ahead of your claims. On the other hand, it’s a large, highly-rated company.

    RioTinto 6.5% due 2018. Currently rated A3/BBB+, the bond was issued at 98.681 on 6/08 but is currently offered at 68, yield to worse of 12.27% (from Trace). This is also holding company bond and appears to have a subordinated claim on operating company assets. That is a hefty yield for a A3 rated company. Both Moody’s and S&P have the bonds listed with a negative outlook. Moody’s put out a press release to that affect yesterday. Still, it would have to be a heck of a downgrade (4 notches), to take the bonds to a below investment-grade status. That said, looks like there were sellers on the news.

    FCX 8.25% due 2015. High end of junk bond spectrum at Ba2/BBB-. Offered around 72.75 for a YTW of 15.10%. These bonds were issued in 3/07 to help fund the acqtn of Phelps Dodge. These are also holding company bonds, but the bank debt is also at the HoldCo, so doesn’t look like there is a lot ahead of you at the operating companies. I’d have to look further tho. That said, I think the bonds are pricing in some sovereign risk as well as operating risk for FCX. 38% of the company’s assets are in Indonesia, 35% North America, 22% Chile, and 5% Peru. I’d like to see where Indonesia debt is trading these days to help price this one.

    In bonds, it’s all about “relative value.” You want to buy the cheapest bond in your targetted risk universe. These 3 bonds cover quite a spectrum, although they are all in the mining sector. With ABX you get a big company with a solid credit rating. RioTinto is currently highly-rated, but any significant downgrade would mean that investment-grade bond funds would have to sell (which is why the bonds are trading so cheap, i think). FCX has country risk on top of the usual mining risk.

    Of the three, without doing any further work on it, I would take the RioTinto’s. I think potential selling pressure by investment-grade bond funds make this one look cheap, relative to the risk. It’s HoldCo, so I would want to do a little more work to see what’s ahead of the bonds in a liquidation scenario. But, seems pretty cheap to me.

    Of course, this advice is worth what you paid for it. But I can see if there is any fixed income research on any of these three, if you wish.

77. tater – one of the guys at Minyanville recently suggested a pair trade along the lines of long XLE short XOM (or something like that but definitely short the majors).

    Looking at the charts they simply never dropped far compared to E&P-ville. So unless crude gets over $100 soonish I find it hard to see how they can “recover” much further than they already have.

    BTW the majors steamed right on up after that pair trade suggestion. I thought it was ill-timed (they were obviously going to benefit from crude jumping off the $40 level) but the observation behind it still seems reasonable.

78. Thanks. Just trying to fit things together. CVX and XOM seem to want to rotate, so I’m just trying to get a feel for where EOG, and similar companies, would fit into some sort of logical trading pattern. No luck as of yet. Probably the reason why I’ve just been trading the indexes with one eye on the underlying names.

79. #77 addendum: although to be fair the Majors never ran up as far into $150 crude as E&P-ville.

    tater: the XOM chart looks freaky (scientific term) to me. What sayeth thou: can a freaky chart be a good chart?

80. 36% of the XLE is XOM (22%) and CVX (14%).

    APA is 3%, EOG is 2.5%.

    I think there might be a better vehicle to go short. Also, I’m not sure there is an equation that says Majors go up if oil goes up. That equation works much better on the E&P names (even the gassy ones) as in theory, a lower oil price is good for the chemicals and refining segments of the Major if not for their E&P arms.

81. BOP:

    thanks so much for the info on the bonds…I really appreciate the info!!!!

82. Dman, that sure seems like a tough way to dice the XLE. I think that I’d rather just short XOM if that were my thesis. Thanks for your help. HOG keeps rallying. Must be part of an index that goes up if the wonderful auto industry succeeds in stealing more of my money.

83. tater – I steer away from pair trades anyway. Hard enough to get one thing right these days.

    HOG still exists? The entire banking & auto sectors obliterated, discretionary spending crashing but HOG is OK? Maybe it’s people preparing for a Road Warrior future …

84. Z – so would you say the majors are more of a proxy for the economy generally?

85. Dman – Over the long term bingo. In the short term, I think they are the fallback for the asset allocation for “energy”. In good times, you want to own the innovators, the guys like, oh I don’t know, CHK who can find new resources and get them out of the ground on a repeatable basis for low $. In times like these, a certain amount of mutual and hedge fund dollars will still want to be in energy but they go household, ala XOM which will still have a lower PE than the S&P for 2009.

86. Dman, just saw #79. I have to say that I agree with you 100% about the XOM chart. I absolutely hate it. On the other hand, Zman’s #85 makes complete and perfect sense. As a result, I am just jumping in and out, playing temporary momentum into what I see as support/resistance. Very time consuming and boring. At least I have my freshly harvested dog balls up on the mantle to keep me company.

87. Life time 4.9% amex card just got lifted to lifetime at 12.9%. Hearing a lot of this. Consumer not going to be there at all to bail out this eco.

88. Re 86: Show them to the cat and say “mess up my friend, and this will happen to you”

89. Off subject

    Stay out of the “Doghouse”!

    http://bewareofthedoghouse.com/

90. Just kidding about that. Vet actually told me he had a guy insist on taking them home. Very odd. OK, enough from me on the very uplifting subject.
    What I have a real problem with on the XOM chart is that I’ve been doing a bit of studying about the RSI indicator. Without getting too in depth, it is a measure of momentum. Anyway, the volume on XOM has been outrageous for the last two months and price has managed to go up about 33% from the lows while never managing to push the RSI into a bullish level. Seems to me that I might need to conclude that there is a very big possibility that shares have actually been unloaded institutionally during this whole upswing, not accumulated.

91. Nice one Sam 🙂

92. I’d better take the vacuume back to the store I guess. Her’s was dual bag also.

93. tater – at risk of mentioning “He Who Ought Not Be Mentioned”…

    Cramer has been screaming (what else?) for months that XOM is “manipulated”.

94. off topic: great return. Someone bought georgewbushlibrary.com for $10 and sold it to the library for $35,000 earlier this year. I just checked and the obamalibrary.com site is still available. Now, I don’t usually give advice but there ya go.

95. Stocks just getting crushed on little volumes. Back to that kind of Friday action after such a promising week.

96. ZMAN – Have you ever evaluated RAM Energy as one of your single digit midgets?

97. Yes, I read that too, not trying to claim the idea as original, I am kind of coming at it from a technical side, in effect trying to give tangible reasons why I tend to think that he does have a point. I just wish that he would actually admit that he has friends at GS that actually do what he claims is going on, so we can just cut to the quick on the whole issue.
    I guess in the end, every stock is manipulated more or less. Just need to figure out which ones are being pushed up and which are being pushed down. Nothing new there I suppose.

98. Ram – I haven’t. I know Reef is not a big fan of RAME despite them being your namesake. They were so over-valued during the summer it was just unfathomable and I should have been short them if nothing else on the way down and that’s not just 20/20 hindsight. Anyway, I don’t management there but will look at it on an assets basis now that you bring them up.

99. Tater – you’d have the keys to the city if you get 97 right.

100. Rame- gonna be gone by April 09

101. Reef – gone in the sense they get taken out or they go out of business.

     Tater – on RSI on XOM I show it kind of creeping up over the last two months from 30 to 55. Don’t know which RSI my software calculates but basically this is oversold at 30 and overbought at 70, right. So we are not yet overbought. I know, my TA is embarrassingly simple so what spin would you put on the 55 number? Thanks.

102. Z
     I was away for a few days and want to know where I can catch up on HK Haynesville news. Is your Wed post the plae to get it. Is XCO what started it.

     Wrap up question. Yeah. Why is PBR off the radar.

     Electricity EPM Dec. release today.
     Check it out. A few pertinant pieces of info. NG electricty revised downward from 649BCF to 601BCF or 1.5 BCFPD.
     I thought it was for sure industrial sector but it seems that the MWH decline was all residential sector -8.6%. Total electricity YOY decline approx. 3.2%. Sept. cdd 07 199 08 170. Would this account for drop.
     So someone forgot to shut the lights at the GM plant. Speaking of which this weeks EIA showed product supplied for jet fuel dropped from 1327 to 1272. Not significant but no doubt that Congress Autobailout restriction on corp. jets is making its mark. LOL.
     I hypothosized a few EIA reports ago that Pet liquids was substituting for NG. Todays Sept. numbers does not support that argument.
     Interestingly residual fuel oil product suuplied jumped from 571 to 958 and down to 428.

     I know … Don’t trust the EIA numbers.

103. obamalibrary.com is taken

104. gonna be gone by aquistion or the other thing?

105. Md – if you go to the reports section of the site under HK Notes, I added everything I thought pertinent to their 3 new wells and some other commentary in there. The XCO news came out first and is welcome news for most of the players here. I think the way to play is them, HK, GMXR, GDP. I don’t so much care for PVA as a play here as they have been drilling the lessor wells and I have to wonder if the east Texas stuff really is as good as the HK sweetspot. BRY is your sleeper play here but it will likely not awaken until they either punch a monster well (and I don’t know the timing re that) or oil gets comfortably back above $50.

     Re PBR – ok, will do.

106. MD – I have a email in with someone who knows a lot more about the refining space than myself regarding the jump in product make this past week. When he responds I’ll bounce the resid question of him.

     On switching I have to say that there just is not a lot overlap between oil and natural gas. Not in terms of industrial processes, nor in terms of spacing heating (people and businesses usually use one or the other) and not in terms of dual fired electricity generation (the capacity that can switch was less than 5% of total several years back when I last looked into it).

107. Happy close?

108. RSI – Wilder created it and the usual interpretation of his work is what you are referring to. Andrew Cardwell and a guy named Baeyens have gone much further with the analysis. (Pretty exciting so far? I knew you’d love to hear all this!) Anyway, feel free to throw out the concepts of over-sold and over-bought. Those don’t work, that much I am sure.
     The RSI moves in channels and ranges, different time charts give different channels and ranges (just like patterns on the price candles in different time frames).
     Anyway, a simpler way to look at RSI is to just see if it is moving in the top 2/3’s of the full range or the bottom 2/3’s (over simplified). A better way of using the indicator is to see if the channels coincide with price movements. Breakouts on the RSI confirm or deny a move on the price.
     Sorry I can’t give more than that. It’s hard to simplify. These guys are math nerds that design this stuff. I can’t tell you how much coffee you have to drink to get through a chapter.

109. Peter is the high yield statistics guru:

     Junk Debt Will ‘Trade Flat’ in First Half of ‘09, JPMorgan Says
     2008-12-12 19:38:55.514 GMT

     By Caroline Salas
     Dec. 12 (Bloomberg) — High-yield, high-risk debt prices will stay where they are during the first half of next year after tumbling to record lows in 2008, JPMorgan Chase & Co. forecasts.
     The average junk bond price has fallen 37 cents to 55 cents on the dollar this year, according to Merrill Lynch & Co. index data. The debt yields 22 percent.
     “Over the next six months, both bond and loan markets will trade flat to today’s levels — not an unattractive proposition at today’s yields,” Peter Acciavatti, a high-yield strategist at JPMorgan in New York, wrote in a report dated yesterday. “That said, it would surprise us more if spreads meaningfully tightened rather than widened. Downside risks, even at these levels, remain high.”
     Speculative-grade debt is unlikely to rally because defaults are rising as the economy contracts, according to JPMorgan. The extra yield, or spread, investors demand to own the debt instead of similar-maturity Treasuries, has widened to 2,092 basis points from 592 basis points at the end of 2007, Merrill data show. A basis point is 0.01 percentage point.
     Credit fundamentals will deteriorate “as fear leads investors, consumers, and businesses to further retrench, tightening an already tenuous lending environment and putting additional pressure on an already weak economy, which would lead to increased defaults,” Acciavatti said in the report. He didn’t immediately return a call seeking additional comment.
     JPMorgan forecasts the high-yield bond default rate will increase to 8 percent, on a par-weighted basis, in 2009 from about 1.4 percent. The market is currently pricing in a default rate of 17 percent next year, JPMorgan said.
     “The fact that more bonds and loans are coming due, coupled with the previously discussed lending environment, simply adds to our concerns regarding the default outlook,” Acciavatti wrote.
     About 4.1 percent of junk bonds mature between now and the end of next year, with 8.4 percent coming due by the end of 2010 and 17.8 percent through 2011, JPMorgan data show.
     High-yield, or speculative-grade, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

110. Tater – sounds like your studying for the CMT. So is 55 and trending up a good thing in your book? Or am I asking a question that is goofy.

111. CNBC reporting oily little Ecuador missing an interest payment.

112. If recent trends continue, newly snapped-up “obamalibrary.com” won’t be bought, it will be “bailed out” 🙂

113. Ecuador has the money… they just don’t want to pay it to “illegal bondholders.”

     Ecuador Defaults on Bonds, Seeks Restructuring (Update2)
     2008-12-12 19:50:05.119 GMT

     By Stephan Kueffner
     Dec. 12 (Bloomberg) — Ecuador won’t make a $30.6 million bond interest payment due next week, putting the South American country in default for a second time in a decade, President Rafael Correa said.
     “The country is in default,” Correa told reporters in his office in Guayaquil. Correa, calling the debt “illegal” and “illegitimate,” said the government will present a restructuring proposal to bondholders in coming days. “We want creditors to recoup part of their money.”
     The country’s bonds plunged to under 25 cents on the dollar.
     By defaulting, Correa, 45, fulfills a threat he made during his 2006 presidential campaign and reiterated throughout the first two years of his term. His decision comes as a deepening global economic slump throttles demand for oil, the country’s biggest export. Ecuador, which defaulted in 1999, owes about $10 billion to bondholders, multilateral lenders and other countries.
     “Ecuador is moving further into isolation,” said Vicente Albornoz, head of the Cordes research institute in Quito. “The hardliners in the government won.”
     Correa, who holds a doctorate in economics from the University of Illinois at Urbana-Champaign, has said he will not sacrifice spending on health and education to pay the debt.
     Ecuador’s foreign obligations are equal to 21 percent of its $44 billion gross domestic product. Argentina’s debt, by comparison, was equivalent to 150 percent of its GDP when it defaulted in 2001, according to Goldman Sachs Group Inc.
     Oil, which has plunged 70 percent since July amid the global financial crisis, accounts for about 60 percent of Ecuador’s exports. Finance Minister Maria Elsa Viteri said on Nov. 18 the country’s fiscal accounts remain “strong and healthy.” Ecuador had $5.65 billion in cash reserves as of Dec. 5, according to the central bank.
     “This is just political,” said Santiago Caviedes, managing partner at investment firm Humboldt Management in Quito.
     “Payments amount to only 0.8 percent of GDP.”

114. Thanks BOP. My thought is that that kind of thing won’t attract any outside capital for energy development.

115. My answer is that though it appears to be trending up, it is not. It is caught in a range that is topped at 55-60 and bottomed at 30ish, so it is actually in a bearish range (or at least not bullish). It “should” have been able to get to a bullish range, topping in the 70’s and bottoming in the 40’s.
     There is also an “RSI squeeze” going on at the 55 level. This also can lead to a bearish view as it “needs” to get above this number soon and display bullishness, or it mathematically has to fall, which can only happen if price falls.
     That is what leads me to question this run up in price. (Question, not deny).
     I will try to get an XOM chart up this weekend that shows this stuff.

116. Z, what is the date for Dec expiration? I have a conflict.

117. Next Friday:

     http://www.cboe.com/AboutCBOE/xcal2008.pdf

118. Getting close to pbrthirty. A good week, the end not withstanding. Like the direction. Hearing a lot of negative commentary about next week’s market data but we almost seem to be getting back to “market climbs a wall of worry”

119. I wonder if I can call my mortgage “illegal” and “illegitimate”. I would have more money to spend on other things.

120. douglas – i see someone is out there, trying to buy $1.5mm of Rio Tinto 5 7/8 due 2013. They are bidding 70, which is a YTW of 15.2%. just fyi.

121. ram – ha!! i was thinking the same thing… wonder if GM will try that same tack.

122. BOP…thanks again.

123. Tater – thanks for the lesson.

124. bird – what does the w stand for in ytw

125. yield to Worst

126. thanks for chiming in, z.

     YTW is relevant when you have a bond that is callable over several years at different call prices. YTW tells you the least amount you could expect to earn if your bonds were called under the “worst” scenario for the investor. It doesn’t apply if a bond is non-callable.

     The Rio Tinto bonds are actually non-call… but it’s just habit for me to quote them as a YTW. I should have said YTM (yield to maturity), as YTM = YTW in this case.

     The bond lesson continues!

     One other feature of those Rio Tinto 5 7/8s is that they are putable at 101, if the bonds fall below investment-grade rated. This explains — in part — why the bonds are trading so cheap. Right at the time a company least needs to have accelerated maturities on their fixed debt, bondholders can make the company buy back their debt above par. It’s actually a stupid covenant, as it can make a bad situation, worse, quickly. It’s that sort of covenant that put Enron into an immediate BK when they were downgraded to junk. Enron had a lot of funding that was immediately due and payable if they were ever downgraded below investment grade. but, i digress… lesson over for today.

127. http://www.energy.gov.ab.ca/Org/pdfs/AB_ProvincialEnergyStrategy.pdf

     New Alberta Energy Strategy.

     It is being perceived as being pro-environment and pro-Alberta upgrading (rather than shipping bitumen blends to the US).

     “Bitumen in kind” references the province taking royalties as bitumen rather than dollars so that in essence it will become an energy marketer (it can then in turn give lower prices to upgraders in Alberta, for example).

128. That document actually has a decent amount of general information about the energy infrastructure.

129. There is also a “production to consumption” life cycle graph so that people can see the comparison of how much more dirty canadian oil sands SCO (synthetic crudes) are compared to conventional light.

     I strongly recommend a browse of at least the global energy graphs.

130. Thanks much V, will do.

131. V – check your email.

132. V – never mind, I have it after all.

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