Worrisome Wednesday

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Sentiment Watch: Back to overtly cautious. Retail sales for April were quite a bit worse than expected setting a negative tone for the day in the broad markets. Oil inventories reported by API last night were bullish on the surface numbers (declines seen in crude, gasoline and distillates inventories) but we will need confirmation from the EIA numbers later this morning to be price supportive, especially with a weak equities tone.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Oil Inventory Preview
  4. Stuff We Care About Today - A quick "How To" on reading the early oil inventories stats page; Multiple Update - Oil Service
  5. Odds & Ends


Holdings Watch: The Wiki tab is updated. Cash is 73% of the $10KP.

  • (HK) - Added another (20), the last piece, to my so far ill-fated HK May $26 call trade for $0.20. Brings average cost down to 42 cents. High risk trade label still applies as expiration is Saturday.

Commodity Watch:

Crude oil rallied over $60 and promptly sold off, closing up $0.35 at $58.85 yesterday. API released a bullish looking set of data after the close showing drops in crude, gasoline, and distillates inventories that sent futures back close to $60 overnight. If those numbers foreshadow the EIA, which this week I actually expect them to, we will be looking at the first set of down inventory data in 11 weeks on crude. After retails sales came out, oil futures shifted to match the mood of the equity markets and are slightly lower as we approach the open.

  • EIA STEO Watch (oil):
    • revised global crude demand from a drop of 1.35 mm bopd to a drop of 1.8 mm bopd for 2009.

    • revised non-OPEC supply up to growth of 100,000 bopd from flat for 2009.

  • OPEC Watch #1: A Platts survey shows April OPEC deliveries were up 110,000 bopd to 28.09 mm bopd, the first increase in aggregate group production since August of 2008. Looks like the Cartel is having a little difficulty maintaining quotas as prices increase.

  • OPEC Watch #2: OPEC cut its global demand figure by 150,000 bopd. OPEC now sees demand falling 1.57 mm bopd (or 1.8%) to 84.03 mm bopd.

Natural gas rose $0.15 to close at $4.45 yesterday. Suddenly gas shorts, who have ruled the room for over a year have to be deciding whether to double down or hit the exits. I can make arguments for either direction in the short term but over the next 3 to 6 months the writing will be clearly on the wall in terms of sliding production. The 12 month strip has increased 23% in the last two weeks. While this may not stimulate a lot of demand for rigs it substantially increases profitability for the E&P sector. For the unhedged the strip provides an opportunity to get more gas contracted at better prices, especially in 2010. This morning gas is trading up 5 to 10 cents in what appears to be a continuation of short covering.

EIA STEO Watch (natural gas):

  • Gas Production Forecast:
    • 2009 was expected down 0.3%; now down 1.0%
    • 2010 was expected down 1.0%; now down 2.8%
  • LNG - They inched up their import forecast from 1.32 Bcfgpd to 1.37 Bcfgpd
  • Canada - they raised their forecast for imports from an expected decline of 11% to a decline of 7%. That makes little sense since the data continue to worsen out of Canada.

Oil Inventory Preview - (estimates from the Bloomberg survey)

API Inventories: Bullish

  • Crude: DOWN 3.13 million barrels
    • Imports: Down 1 mm bopd from the prior week
    • Refinery Utilization: Down 1.7% - that's counter-seasonal
  • Gasoline: DOWN 2.0 million barrels
  • Distillate: DOWN 1.76 million barrels

ZComment: Across the Board Unexpected Inventory Draws

A) That is a monster drop in imports, which translates into what I’d call a “low quality” beat on the numbers. Not nearly as bullish since imports can be flighty and you’d rather see cranked up in demand causing the decline in barrels in storage.

B) On the other hand, the gasoline dip is likely attributatble to a bit of increased demand AND softer gasoline production. Last week's numbers revealed pathetic demand for this time of year. One of two things need to happen and pronto and perhaps in combination.

  • The consumer needs to start driving more. Pretty obvious but my faith in the summer vacation or travel abroad or by plane in-country for the average cash strapped U.S. average Joe family is bolstered by this story relating an expected increase in Memorial Day travel.
  • Refiners simply need to monitor demand and quickly ratchet back production if it remains weak. 

C)  This time of year, we start to see gasoline prices start to wag the crude price dog so even though crude demand is weak, any possibility of a reduction in gasoline inventories will be supportive of crude prices.

Stuff We Care About Today

How I Read The Oil Inventory Report ... Quickly.

I was asked awhile back to provide a brief run through of how I look at the oil inventory numbers as they come out on Wednesday morning. First, familiarize yourself with the EIA's "Special File" on this page of the EIA website. This statistical summary is the report that comes out first, at 10:30 EST each Wednesday. The oil inventory report comes out a few hours later in a prettier format.

We'll use last week's report as an example as the format never changes (EIA text is in blue):

Summary of Weekly Petroleum Data for the Week Ending May 1, 2009

U.S. crude oil refinery inputs averaged about 14.8 million barrels per day
during the week ending May 1, up 420 thousand barrels per day from the previous
week's average. Refineries operated at 85.3
(note 1) percent of their operable capacity
last week. Gasoline production increased last week, averaging 8.9 million barrels
per day. Distillate fuel production was slightly higher last week, averaging 4.2
million barrels per day.

U.S. crude oil imports averaged 9.9 million barrels per day last week
(note 1), up 96
thousand barrels per day from the previous week. Over the last four weeks, crude
oil imports have averaged 9.7 million barrels per day, 156 thousand barrels per
day below the same four-week period last year. Total motor gasoline imports
(including both finished gasoline and gasoline blending components) last week
averaged 823 thousand barrels per day. Distillate fuel imports averaged 165
thousand barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic
Petroleum Reserve) increased by 0.6 million barrels (note 1) from the previous week. At
375.3 million barrels, U.S. crude oil inventories are above the upper boundary
of the average range for this time of year. Total motor gasoline inventories
decreased by 0.2 million barrels
(note 2)last week and are in the upper half of the
average range. Finished gasoline inventories rose last week but gasoline
blending components inventories decreased during this same time. Distillate fuel
inventories increased by 2.4 million barrels
(note 2) and are above the upper boundary of
the average range for this time of year. Propane/propylene inventories increased
by 2.4 million barrels last week and are above the upper limit of the average
range. Total commercial petroleum inventories increased by 7.9 million barrels
last week and are above the upper limit of the average range for this time of

Total products supplied over the last four-week period has averaged 18.2 million
barrels per day, down by 7.9 percent compared to the similar period last year.
(note 3) Over the last four weeks, motor gasoline demand has averaged 9.0 million barrels
per day, down by 0.9 percent from the same period last year. Distillate fuel
demand has averaged 3.5 million barrels per day over the last four weeks, down
by 14.1 percent from the same period last year. Jet fuel demand is 11.6 percent
lower over the last four weeks compared to the same four-week period last year.

Note 1 - Imports and utilization numbers and the crude storage number. While the headline number of what crude did is important to the initial move in crude that move is often reversed once traders delve deeper, to notice that "oh, it was only a spike or slump in imports and not a demand issue"

Note 2 -   Gasoline and distillate inventories. I take a quick look at these versus expectations, then I go looking for why they came out the way they did (high production, low demand, high imports etc). Everything is relative to what is "normal" for this time of year and how the season has been trending. Imports are easier to forgive as a bearish signal as they are often volatile.

Note 3 - Total products supplied. I glance at this for trend but honestly don't give it as much credence as I do the previous two notes which are the parts that contribute to this number.

I then skip down to the tables that follow the report's opening paragraphs to see the change at Cushing (the Nymex pricing point for oil) and then further down, to the bottom of the file to see the weekly demand figures. The last blue paragraph above contains the four week averages for demand but it's also good to see the week to week numbers as averages can easily mask the early signs of a change in trend.

Oil Service: Earnings Estimates Continue To Slip; Stocks Have Become Much More Expensive.


  1. I have puts on HAL and CRR at present ... not getting any leverage on a retracement of the recent rally let alone a move lower based on a continued decline in fundamentals.
  2. Barclays cut their rating on the group last week but they are nearly alone in their bearish tone.
  3. I expect a protracted downturn in U.S. activity and a further slide in business around the world.
  4. Last night the CEOs of XOM and TOT called on service companies to further reduce pricing saying that they need to think about restructuring some contracts and hinting at project delays.
  5. Bull argument:
  • look through the drilling trough cycle
  • margins will be maintained as prices fall via cost cutting
  • oil and gas prices are turning up so so too will activity
  • the stocks are already beat down

My response to those arguments is that the cycle of low activity will likely last longer than history would suggest, recent results which largely beat sharply reduced estimates did not see a full quarter's measure of reduced pricing, forward multiples have become stretched and estimates continue to inch lower and will likely move further south as the 2Q numbers approach. However, I continue to take it easy on the put side as the Street can run over even the best of ideas if it simply wants to move the names higher. 


Odds & Ends

Analyst Watch:

  • (CLR) raised to Strong Buy at Raymond James, price target goes from $30 to $40.
  • (REP) cut to underweight at HSBC
  • (MRO) cut to Market Perform at Berstein.

Article on the drybulks - largest idle fleet ever gathered.

129 Responses to “Worrisome Wednesday”

  1. 1
    BirdsofpreyRcool Says:

    Credit/Bond/Banking Reading List for Wednesday —

    For anyone wanting to increase their understanding of the credit markets, deflation, interest rates, bankrupcy rules, and just plain moral hazard, we have two articles on the Must-Read List this morning. They are too long to post. But say volumes about what is going on in the real world. At the same time you have our own Govt stepping in to tell banking employees what they can make (under the guise of “risk control”). If you don’t think the combination of these three things make the act of borrowing and lending in the US costlier and more restrictive, then I suggest you just sit back and watch the developments.

    Real Rate Shock Hits CEOs as Borrowing Costs Impede Recovery


    Chrysler and the Rule of Law


  2. 2
    Sambone Says:

    By Reza Amanat

    LONDON (Dow Jones)–Crude oil futures traded sideways Wednesday, giving up
    early gains after European equity markets weakened and the dollar regained lost
    ground against the euro, market participants said.
    Brent oil futures rose to hit a six-month high at $59.05 a barrel earlier in
    the day, catching up with similar moves by Nymex crude Tuesday, which traded
    above $59 a barrel for the first time since November.
    Prices continued to be steered by the currency market and improving economic
    sentiment, although many participants questioned the wisdom behind the recent
    strengthening, considering the faltering demand and brimming crude inventories.
    “We are seeing greater cross-correlation between FX, Equity and oil markets
    which detach oil from its underlying fundamentals,” Harry Tchilinguirian,senior
    oil market analyst at BNP Paribas in London said.
    “Oil, as a consumption commodity should show greater sensitivity to current
    rather than future conditions and the inventory overhang we currently observe,”
    he added.
    At 1147 GMT, the front-month June Brent contract on London’s ICE futures
    exchange was up 24 cents at $58.18 a barrel.
    The front-month June contract on the New York Mercantile Exchange was trading
    33 cents higher at $59.18 a barrel.
    The ICE’s gasoil contract for June delivery was $3.00 up at $486.25 a metric
    ton, while Nymex gasoline for June delivery was up 175 points at 168.54 cents a
    Oil prices once again sidestepped the supply-and-demand outlook, instead
    focusing on short-term moves on currency and equity markets. The return of
    capital flows into commodities is also seen as a supportive factor behind the
    recent gains, traders noted.
    “Not only have capital flows begun to return to commodities markets, but their
    impact in some ways seems greater than ever: rallying prices in the face of
    bulging inventories and ailing demand are breathing new life into old arguments
    about the respective role of fundamentals and speculation in price formation,”
    said Antoine Halff, deputy head of research at Newedge in New York.
    Market participants are expected to train their sights on the U.S. Department
    of Energy data due at 1430 GMT, with analysts expecting across-the-board builds
    in crude and products stocks.
    According to the average of a Dow Jones Newswires survey of analysts’
    forecasts, oil inventories rose 1.3 million barrels in the week ended May 8.
    Gasoline inventories were probably unchanged on the week while distillates,
    including heating oil and diesel, are forecasted to have risen 1.3 million
    barrels, the survey showed.
    Data from the American Petroleum Institute Tuesday thwarted market
    expectations, reporting a 3.1 million-barrel decline in crude stocks, 2
    million-barrel drop in gasoline stocks and a 1.8 million-barrel decrease in
    The Organization of Petroleum Exporting Countries monthly oil report
    Wednesday, provided little cheer for those wanting a reverse in builds of crude
    stocks, after it revealed that the exporting group’s oil output rose in April
    for the first time since July 2008, despite a greater-than-expected fall in
    demand this year.
    -By Reza Amanat, Dow Jones Newswires
    (Benoit Faucon in London and Yee Kai Pin in Singapore contributed to this

    Dow Jones Newswires
    05-13-09 0803ET

  3. 3
    Sambone Says:

    Business Week on Oil prices


  4. 4
    zman Says:

    Sam – Is Phil still bullish?

  5. 5
    zman Says:

    So when you get an economics degree does it come with a dart board? The predictions of a rally in retail sales were lousy. This seems to happen every time the equity markets turn up. I guess they factor in consumer sentiment but it would seem an even better idea to get on the phone with the big retailers. Ugh.

  6. 6
    BirdsofpreyRcool Says:

    Credit Markets on Wednesday the 13th —

    IG 153 +4 to yesterday’s close

    HY 80.06 -about 1 point from yesterday

  7. 7
    Sambone Says:

    Uncle Phil – Yep, bullish!


  8. 8
    tater Says:

    Thanks for the “How I Read the Oil Report”. I’ve spent a good amount of time on the EIA site, but it always feels like I’m walking around in the dark looking for the light switch. If you want to keep that going, it sure is helpful.

  9. 9
    zman Says:

    Tater – if you can point out areas that seem dark I will do what I can to illuminate them. I used to live on their site for a living.

  10. 10
    tater Says:

    Dark = between my ears

  11. 11
    BirdsofpreyRcool Says:

    WRES just announced that their borrowing base was reaffirmed at $120mm. Good thing… they have $115mm already drawn.

  12. 12
    Sambone Says:

    #5 Zman, Zman
    Come on, you know the market is up, so the banks can sell more shares to get cash to pay off their TARP bills, so they can then give themselves bonus’s.

  13. 13
    jy Says:

    Re #11
    We have seen several of these bank redeterminations over the last few weeks come in very near to the amount that companies have already borrowed. WRES, SGY, etc. What does this mean for the company? They’ll have to sell stock or bonds to raise cash beyond cash flow I’d assume. This must harm their flexibility. I’m trying to figure out the implications.

    Comments? Fire away!

  14. 14
    jat Says:


    Just a general thought. We can’t argue that “writing will be on the wall” for gas production but, as this squeeze continues, don’t we have to give more credence to the argument of full storage / gas-on-gas competition / severe price weakness come Sept? So, gas can be plenty strong come early / mid 2010, but reason to worry for a price well below the current $4.50 in coming months?

  15. 15
    BirdsofpreyRcool Says:

    jy — I think you pretty much answered your own question.

    One additional “finance” way to look at it. Anything that decreases the financial flexibility of a company also decreases the theoretical time they have before facing financial distress (bankruptcy). Anything that decreases time value, decreases the value of the embedded “call option” in a company’s stock. This is not saying that the company is headed for BK. Just that the odds (and time value) have changed. All else equal, the stock price goes down.

  16. 16
    1520sbroad Says:

    #5 – why visit a retailer when you can “model” it with a fancy excel spreadsheet.

  17. 17
    BirdsofpreyRcool Says:

    KOG — the volatility will continue, until real news comes out. Until then, I am hoping it falls back to 85¢. I sold all my financial services stuff on monday and have some cash to put toward event-driven investments. Just sharing thoughts….

  18. 18
    zman Says:

    Re 12 & 16. Right, right, sorry, I’ll take my pills now.

    Re 13 – the redeterminations have been largely neutral. In the case of WRES, its good its above what they have borrowed but its also good they have a minimalist capital program planned this year, $12 mm if memory serves which is essentially a maintenance budget. Were they to expand that beyond the $5 mm left on the line plus cash flow you’d have deal around the corner concerns. Don’t get me started on SGY, not a big fan of their style or story. Can’t believe I didn’t short that thing along with its other offshore, low reserve life treadmill lifestyle peers as prices came off last year.

    Anyway, the redeterminations have to be looked at on a case by case basis. So far the bankers are signaling, again for the most part, a willingness to believe that commodity prices will come back. If you get much lower oil prices for a protracted period this willingness will evaporate and banks will start owning reserves which gets messy. We are not there yet.

    Jat – I think full storage is a foregone conclusion as you know. I think prices will rally in advance of late 2009 full storage and that the numbers have upside potential from hurricanes (yeah, I said it, call me a fear monger), a lack of an LNG tsunami (suddenly all the guys wanting to import it are applying to FERC to export it), deliverability issues from Canada, and then supply. Also, I think gas takes share this summer from coal, especially in the southeast so if its hot in Florida and thereabouts you could see some suddenly weak injections this summer. So I don’t see “severe price weakness” this September but I don’t see $7-8 either which seems to be the new “gear up” gear up level for the E&Ps.

  19. 19
    zman Says:

    CRR and HAL – weaker with the broad market, little more. The OIH has outperformed and its coming off a little more than other energy or the broad market today. I generally like to recognize when things are not working as planned and change them. HAL I will come out of soon. No sense fighting the powers that be no matter what I think about earnings potential. CRR I am looking at more technically and that one looks to be on the brink of a drop.

  20. 20
    zman Says:

    From the compliance restrained brokerage community:

    Z: After having read the MS report last night they made some interesting points. They are saying that if you started a company today and were dominant in the 4 major shale plays, you are a low cost producer and your costs have been farmed out, what would be wrong with this picture. The noise of Aubrey’s pay package, the serial issuer and general distrust is leading most of the street to be non-believers. That is why they see CHK as an opportunity. All Aubrey has to do is just keep his head down and execute. When the non-believers become believers the stock will be much higher. S

    My thought: I could not have said that better myself. I own the stock, some much higher and some lower and plan to continue to. I have avoided the options through much of this year due to noise about Aubrey and some gunslinger moves that while I think will likely to be long term beneficial are not yet appreciated by the market.

  21. 21
    zman Says:

    What did Tim G. say this morning?

  22. 22
    BirdsofpreyRcool Says:

    Credit Market voting with their feet —

    HY 79.875

    IG 154

  23. 23
    tater Says:

    I’m the most bearish guy in the room, but all the financials have done here is to go back and visit the 20 EMA area. Need a break below that to see evidence of trend change instead of just simple swing action.

  24. 24
    zman Says:

    Tater – I hear ya re not much of a move down. What do you have as support levels on the SP500 now?

  25. 25
    BirdsofpreyRcool Says:

    I don’t think Geithner’s comments had much impact. Didn’t listen, but think he was trying to be soothing. Saying “the financial system is starting to heal” and that the TARP capital program is going to reopen for small banks.

    On the other hand, you have front page news about the Govt wanting to further control financial services compensation.

    So, they lure you in with sweet, soothing words (“here… have some nice TARP… tastes gooood”), then once inside, they bop you over the head with a club.

  26. 26
    zman Says:

    Oil inventories in 15 minutes. Worry in the market place is that EIA does not confirm last nights API. Last week they sort of did but not entirely. If they do and we see big draws instead of builds I’ll be back in CLR and potentially adding a little bit EOG as well.

  27. 27
    AAA Says:

    Z, re #20, You’re probably correct that the stock will go a lot higher and no doubt they’ve made some smart moves. I think the issue with Aubrey goes far beyond “noise” over his pay package however. He has shown both a reckless disregard for risk and a near complete disdain for the responsibilities of running a public versus private company. In general, I love the idea of the CEO buying stock in his own company. Not however, when he is so clueless that he is forced to sell out on a margin call and nearly takes the stock to zero doing so. Then we get the spectacle of a compliant board giving him both a ridiculous pay package and buying a bunch of junk from him for an obscene price. This company will be mired in shareholder litigation for a long time and will end up having to pay plaintiffs’ attorneys fees in the millions. I just don;t see getting involved when there are near perfect substitues without any of this sideshow.

  28. 28
    jiveyjr Says:

    tater..you post a public chart list on stockcharts.com don’t you…if so how would I locate some of your work??

  29. 29
    zman Says:

    AAA – I hear ya. Until I’m paid at that level I’ll not defend it. See the golden coffin stories going around today and you’ll think Aubrey is only middle class.

    Regardless, he’s accumulated large positions in the 4 biggest shale plays in the U.S.. In 2 to 3 years, when gas prices return to the high single or low double digit range, I think the stock will be considerably higher. At that time, the differentiating factor will be the ability to sell down interests to monetize and delever the company.I think in the interim new purchases by the CEO will be accompanied with a policy statement showing no margin was employed. If you want the opposite end of the scale, I’d suggest EOG and Mark Papa, still huge acreage, lots of locations and a bit more oil, but cleaner balance sheet (maybe not levered enough for a rally in prices) with an ability to quickly turn on the taps for higher production but always with an eye towards IRR.

  30. 30
    zman Says:

    jivey – its under a link called Tater’s TA at upper right on this site.

  31. 31
    tater Says:

    S&P battle is at 894. For now, above it the bulls are going to push you. Below it the bears will lead. If bears win here I think we get back to 880ish.

    I posted a chart for HOG because it gives an excellent representation of what is going on in New York trader-think. As bearish as I am fundamentally, charts are actually bullish longer term view (for now). Meaning we have to tread lightly with our opinions (me).

    List is in no particular order, click the “Chartbook” at top right of page to bring up a toggle for locating charts in an easier manner.

  32. 32
    zman Says:

    EIA Inventory Report:

    crude down 4.7

    oil at time of report: $59.10

  33. 33
    zman Says:

    ZTRADE: Added (20) May CLR $30 Calls for $0.15 as a high risk oil bump up play on a big draw in crude.

  34. 34
    VTZ Says:

    Z – You think we return to high single digit to low double digit NG even with all the shale growth and potential for LNG in the next 2-3 years? It doesn’t seem to me that supply would be the problem, so I’m guessing you’re talking significant electrical/industrial demand increases?

  35. 35
    BirdsofpreyRcool Says:

    Very nice summary of the risks in a KOG investment, out this morning. Explains the air-pocket the stock hit this morning. Until we have real news out, KOG is not worth $1.25/share. —

    When the company last raised equity, 6.8MM shares at $2.75/share for net proceeds of $17.6MM dated August 2008, we commented that investors would not hesitate to abandon this micro-cap story should the company come up short of exhibiting a competitive return on invested capital. All about PV per USD invested, in our opinion. We’ve observed little by way of PV creation thus far. Well, the company raised equity capital, again, at $0.75/share for gross proceeds of $7.5MM. We understand the sense of urgency and need for funds (this is a capital-intensive business), but remain unconvinced the company can turn cash burn into cash generation. Not helping is the overhang of finding a home for its second contracted rig in the Bakken and avoiding the approximate $6.0MM termination fee, amortized or not. Getting this done obviously reduces the financial risk of the story.

    We view the equity raise as one more in a long history of dilution events that have resulted in negligible value accretion. Looking ahead, we see the expected drilling results and associated production from the Bakken Shale play as potential catalysts for the shares and, maybe, evidence the company can drive its P&L in a higher commodity price environment.

  36. 36
    zman Says:

    More on crude

    Oil down 4.7 mm barrels – big 1.2 mm bopd drop in imports

    Refineries did indeed cut demand back, with utilization plummeting to 80.4%.

    Gasoline inventories fell 4.7 mm barrels

    Gasoline production was off, gasoline demand was again pathetic at 8.9 mm bpd.

    Distillates up 1 mm barrels

  37. 37
    BirdsofpreyRcool Says:

    Credit Market rebound —

    HY 80.06 back to where it was at stock mrkt open

  38. 38
    zman Says:

    So, as per the post, that’s a “low quality” bullish set of oil numbers, low imports could be storms in the Gulf or reporting vagaries.

  39. 39
    zman Says:

    VTZ – Regarding the shale gas, it does not seem to be coming on as fast as many had predicted. Bullet points would be:

    The Barnett appears to be topping out on growth and/or even rolling over. Depends on who you listen to. The growth component that it was is no more, at least at these prices.

    Not every Haynesville well is making 20 MMcfepd.

    The horizontal rig count going after those well is off substantially as well. It was thought a couple of months back that rigs drilling for gas were only dropping off the vertical effort but the bigger horizontal programs have been whacked as well.

    I think that a ramp in drilling will only come once the Strip is around $7 and there for some time. A lot of managements espouse the “why grow at these prices” argument. I think some of them actually believe it and the rest just like to set low bars for themselves on quarterly calls. In aggregate though, the programs won’t ramp back up quickly, meaning a slide in production in 2009 and more in 2010 is just about inevitable. Put that up against a recovery in industrial productivity (at some point) who are enjoying some really low gas prices now and the gas for coal dynamic and I think prices get back there sometime next year. A lot depends on summer and winter of course.

    I think Canada is starting to enter into peoples minds. Canada used to routinely supply 8+ Bcfgpd day to the States. Last week it was below 6.

  40. 40
    BirdsofpreyRcool Says:

    BTW, both TT and HT say to “sell the rallies” today. But both have low conviction on the recommendation.

  41. 41
    zman Says:

    Oil so far not liking the lack of gasoline demand growth and the low imports number.

  42. 42
    zman Says:

    BOP – feels like a time for lots of cash.

  43. 43
    Sambone Says:

    LONDON (Dow Jones)–The main militant movement in the Niger Delta Wednesday
    threatened oil companies and called for the swift evacuation of their staff
    following an attack on its camps.
    “Oil companies operating in the region are advised to evacuate their staff
    within the next 24 hours to avoid them being part of the statistics of an
    emerging civil war,” the Movement for the Emancipation of the Niger Delta, or
    MEND, said in an e-mail.
    It said the threat was in reprisals for what it said was an “unprovoked attack
    [by the Nigerian army Wednesday morning] on two major MEND camps in Delta
    state,” in the western part of the oil region.
    Militant attacks have cut oil output in Nigeria by at least 500,000 barrels a

    -By Benoit Faucon, Dow Jones Newswires

    Dow Jones Newswires
    05-13-09 1017ET

  44. 44
    Sambone Says:

    By Jason Womack

    HOUSTON (Dow Jones)–Natural gas traded slightly lower Wednesday, moving in
    tandem with crude oil, after a morning of choppy trade.
    Natural gas for June delivery on the New York Mercantile Exchange was trading
    5.8 cents, or 1.30%, lower at $4.391 a million British thermal units after
    opening floor trade 3.3 cents higher at $4.482/MMBtu.
    Natural gas had been moving higher with equities and other energy commodities
    on recent economic news and after reaching a 6 1/2-year low of $3.155 at the
    end of April. Nymex June crude had been slightly lower. It recently was trading
    relatively flat at $59.10 a barrel.
    “Until tomorrow, when we get a storage report, natural gas is following the
    broader commodity complex,” said Lisa Zembrodt, a commodity analyst with Summit
    Energy in Louisville, Ky.
    Natural gas prices have been under pressure from robust natural gas production
    and swelling stockpiles of natural gas. At the same time, the recession was
    cutting into demand for the fuel as industrial gas users began scaling back
    The decline in demand helped pushed gas prices down more than 75% from their
    summer-time highs above $13/MMBtu and forced producers to idle rigs and trim
    production forecasts.
    “We had reached a number that discounted all of the bearish influences,” Peter
    Beutel, president of Cameron Hanover, a New Canaan, Conn., energy advisory firm
    said, noting that the brisk decline in drilling activity was creating concern
    that supply would begin to dwindle.
    The number of rigs drilling for natural gas in the U.S. has fallen by more
    than half since September, according to data from oilfield services company
    Baker Hughes.
    Jim Ritterbusch, president of the energy advisory firm Ritterbusch and
    Associates, wrote in a note to clients Wednesday that the market has
    outperformed by focusing on “future demand improvement” but it will still need
    to contend with high storage levels.
    Natural gas storage levels stand at 1.918 trillion cubic feet – 34.4% higher
    than last year and 23.3% above the five-year average.
    Analysts expect that relative surplus to continue to expand in the coming
    weeks, putting further pressure on prices.
    “This implied additional expansion in the supply surplus could go a long way
    in capping this ongoing price advance,” Ritterbusch wrote.

    -By Jason Womack, Dow Jones Newswires

    Dow Jones Newswires
    05-13-09 1024ET

  45. 45
    VTZ Says:

    Thanks for the comments.

  46. 46
    BirdsofpreyRcool Says:

    Add this to the daily Credit Market Must-Read List. If we are all going to pay more to borrow capital, at least we should know the reasons why.


  47. 47
    BirdsofpreyRcool Says:

    z — when in doubt, sitting on a pile of cash just feels right.

  48. 48
    BirdsofpreyRcool Says:

    HT reports that GSCO is still buying pullbacks… 500+ contracts so far today.

  49. 49
    tater Says:

    Added a 60 min chart for CLR. Seems to be catching support from that gap from a couple of days ago.

  50. 50
    zman Says:


    Sold (10-all) HAL June $22 Puts (HALRV) for $1.50, up 21%. Got tired of fighting the tape here, will the idea soon.

  51. 51
    Sambone Says:

    By Gregory Meyer

    NEW YORK (Dow Jones)–Oil futures rose tentatively Wednesday after government
    data showed U.S. crude inventories shrank for the first time since February.
    Light, sweet crude for June delivery traded at $59.07, up 22 cents, or 0.4%,
    on the New York Mercantile Exchange. Brent crude on the ICE Futures exchange
    traded 28 cents higher at $58.22 a barrel.
    Domestic crude inventories fell 4.7 million barrels to 370.6 million barrels
    in the week ended May 8 as imports plunged, the U.S. Energy Information
    Administration said in a weekly report. The decline put an abrupt end to a
    pattern of weekly gains that had taken stockpiles to their highest level since
    September 1990.
    While crude futures initially rallied, they pared gains within a few minutes
    of the data release.
    “Inventories are still high, but the market is looking for a bullish rush
    now,” said Chris Thorpe, managing partner at oil options dealer Hudson Capital
    Energy in New York. Money pouring in from investors spying a market bottom
    helped push crude futures to a six-month high on Tuesday.
    The report showed gasoline stocks fell by 4.1 million barrels and stocks of
    distillates, which include heating oil and diesel, rose by 1 million barrels.
    Other news hitting the market was mixed. In Nigeria, a major crude exporter,
    militants in the troubled Niger Delta region warned oil companies to evacuate
    staff to prevent casualties from what it called “an emerging civil war.”
    Militant attacks have cut the country’s oil output by at least 500,000 barrels
    a day.
    Data from China’s national statistics bureau indicated its demand was up in
    April, as refiners processed the highest amount of crude since October. But a
    source told Dow Jones Newswires that in May oil product inventories held by
    China’s two main fuel suppliers have risen, as demand slowed.
    The EIA’s short-term energy outlook, published Tuesday, said world oil demand
    will decline by 3.4 million barrels a day, or 3.9%, in the current quarter from
    a year ago. Against that backdrop, a report Wednesday from the Organization of
    Petroleum Exporting Countries could also dampen future rallies.
    OPEC said its oil output last month rose for the first time since July 2008,
    with oil pumped by its 11 members subject to quotas up 224,300 barrels a day
    from March.
    The output data, based on secondary sources but used as reference by OPEC,
    indicate many members are struggling to comply with 4.2 million barrels a day
    of cuts the cartel agreed to last year. That makes them likely to decide
    against any new formal reduction at the group’s next meeting May 28.
    Front-month June reformulated gasoline blendstock, or RBOB, rose 2.41 cents,
    or 1.4% to $1.6920 a gallon. June heating oil rose 32 points, or 0.2%, to
    $1.5102 a gallon.

    -By Gregory Meyer, Dow Jones Newswires
    Dow Jones Newswires
    05-13-09 1115ET

  52. 52
    zman Says:

    Refiners turning positive. They like the discipline of the low utilization number.

  53. 53
    elduque Says:

    Good morning.

    BDI +79 2332

    Thank you Z for the breakdown of the inventory report.

  54. 54
    zman Says:

    Elduque – glad to, forgot about for a time, thought today was a good day with the market being a bit slow on news. Will dress it up and put on the dictionary tab.

  55. 55
    Bob Says:

    The LA. Oil & Gas Assoc has a great educational video on the horizontal drilling process and fracture treatment. Short and informative (make sure your sound is on!):


  56. 56
    zman Says:

    Cannacord raises SU to strong buy, ups target from 35 to 41 C$.

  57. 57
    zman Says:


    Last of this expiration’s high risk trades.

    Added (20) HK $24 May calls for $0.40 with the stock trading at $23.75, off another 4%. Not a lot of money and I am still largely (about 75%) in cash.

  58. 58
    zman Says:

    Was watching Doug Kass on CNBC early this am. He was commenting on the nature of most market participants to be momentum traders. Not that that’s a shocker but I have to note there are a lot less comments on down days than up days around these parts. I prefer to sell the rallies (like last week) and buy into the weakness. As long as this isn’t the last bit of strength we see, that generally has worked well for me. Study up and know your names and execute when things look out of whack. Anyway, not ready to call an end to this 3 day pullback but I just thought I’d throw it out there that I thought Kass made a good point about investors being happier to pay higher prices due to the charts than they are to try and scoop something.

  59. 59
    Garyinhou Says:

    i’m with you on 58.. waiting for my next bottom fish moment..

  60. 60
    zman Says:

    CRR finally starting to show some cracks.

    Oil flat, NG flat, gasoline up a percent, refiners unched which is good on this very red day.

  61. 61
    1520sbroad Says:

    BOP – any desk chatter that you have heard on the C preferred conversion arb?

  62. 62
    Popeye Says:

    Cool video re:55. I was under the impression that it was possible to have multiple laterals running in diff directions?

  63. 63
    zman Says:

    Pop – it is.

  64. 64
    ram Says:

    I wonder if the short term top is in and were down into next week. Did we achieve Nicky’s top objective?

  65. 65
    zman Says:

    Bidding a little June PXD position.

  66. 66
    zman Says:


    Added June PXD $25 Calls (PXDFE) with the stock at $25.10 for $2.20. I liked it with lower oil and gas prices last week at $30 so I like it a little more 20% lower.

  67. 67
    zman Says:

    Just got a piece synopsis of Simmon’s thoughts on Oil Service. They are becoming increasingly nervous about the recent move, valuations, and the nature of the money that has been entering the group (fast, hedge fund money looking for laggards)

  68. 68
    zman Says:

    TARP trickle down?


  69. 69
    ram Says:

    ZMAN – Do you recall Nicky’s short term objective on the S&P?

  70. 70
    tater Says:

    from yesterday:

    Nicky Says:
    Good morning to all.
    Z – sorry not to get back to you yesterday – however I just checked yesterday’s posts and see Tater’s question.
    Not much has changed from last week for me. Indices – We are oh so close to a turn but I think the count shows we need one more up. I think we could test the 900 level on the spx and then bounce and touch that pesky 200 dma before the meaningful correction. Its possible the top is in and we are going to need to bust through 900 for that. Options expiry Friday is likely to lead to volatile swings which would fit nicely with the wave pattern for a higher high!
    Oil is trading in step with the Dow. A high is likely this week and will likely coincide with the top in the Dow – I am still targetting the $62 – 65 area.
    The $ – I said a couple of weeks ago that we look likely to test the December lows of 78. We did go through trendline support in the 83 region. I am not entirely convinced that we go too much lower here. The euro has resistance at 1.3740.

  71. 71
    tater Says:

    And thank you very much Nicky

  72. 72
    jy Says:

    Regarding the redeterminations– Thanks for the comments ZMAN and BOP!

  73. 73
    nifkin Says:

    anyone see headlines regarding Colorado State lowering thier huricane forecast on el nino?

  74. 74
    ram Says:

    Thank you Tater.

  75. 75
    zman Says:

    He’s saying he may drop it from 12 storms to 11.


  76. 76
    nifkin Says:

    ty much

  77. 77
    tater Says:

    The 20 EMA on the S&P is 881. Wondering aloud if we may have a bounce attempt coming soon.

  78. 78
    BirdsofpreyRcool Says:

    1520s — just got back. Haven’t heard anything about the C conversion. Have you?

  79. 79
    zman Says:

    Losses accelerating post lunch. Feeling pretty patient despite some big % moves in the group.

  80. 80
    zman Says:

    See RBC confirming short cover in NG. They were thinking gas can rally on technicals towards $4.88. I would not bet on that.

    T – thanks for that CLR chart add.

  81. 81
    tater Says:

    In your experience, do those CLR 30’s have a chance to make any $ if we get CLR to trade back to 27.50ish by Thurs afternoon, or would they just likely sit at .10 ?
    Hard question. Looking for a best guess.

  82. 82
    1520sbroad Says:

    BOP #78 – nothing new as far as timing on the conversion. The arb is widening back out some even on the preferreds at the top of the queue.

  83. 83
    zman Says:

    27.50 is not going to be enough.

  84. 84
    BirdsofpreyRcool Says:


    · Equities trade near session lows with SPX dn 17pts as noon passes; stocks & credit opened weak and continue to trade poorly into mid-day. Much of the pullback still due to vanillas taking profits after some big moves, though short activity is starting to pick up in some sectors (along w/a lack of institutional sponsorship on buyside). Similar to yesterday, the “safety” trade remains on, w/health care leading the market (up 0.5%) and staples/telco carriers also outperforming (although both those sectors are in the red today); within healthcare, pharma is driving the group higher. Financials, consumer discretionary (i.e. retailers), tech, and esp. industrials, are all leading the market lower (industrials off nearly 4% on the day). A slew of negatives are being pointed to for the selling (inc. neg. eco #s & new supply…see below).

    · Credit taking a sizable hit along with stocks; HY12 traded down over a full pt mid-morning while IG12 is ~5bps wider. On the selloff in stocks & credit, some money is rotating back into US tsys (30yr tsy is up over a full pt). From Fri’s high of 930, sp500 now dwn 4.3%.

    · Technically, SP futures took out a number of support levels this morning, and broke below the 891-894 uptrend line that many were watching; our futures desk says futures are at an important juncture, with a series of lower highs and violation of Naz 100 trend line a harbinger for lower prices. Next levels being watched are not until 876 & 870.

    Negatives being pointed to for the selling:

    · Somewhat disappointing Euro eco #s – Euro area industrial production ex construction fell 2%m/m in March, a slightly slower pace of contraction than the average 2.5% decline seen over the previous six months. The outcome was worse than we and consensus expected at the end of last week (-1%) but is in line with our most recent projection, which took account of the disappointing Italian and French IP releases a couple of days ago.

    · Somewhat disappointing China eco #s – IP rose a weaker-than-expected 7.3%oya in April, compared to 8.3% in March. Seasonally adjusted, April IP edged down -0.4%m/m, sa, but this followed strong gains of 4.4% in March and 10.5% in February.

    · Somewhat disappointing US eco #s – Retail sales comes in -0.4% vs expected +0.0%; Retail sales were disappointing in April, falling 0.4% overall and 0.5% excluding auto dealers. The retail sales report is a clear contrast to other incoming information, which while not particularly good had at least been less bad than in earlier months. Unfortunately, the implication of the retail sales report is that real consumer spending in 2Q will decline after what had been originally reported as a 2.2%q/q, saar increase in 1Q (we now estimate 1Q spending will be revised down to 1.7%).

    · New supply coming to the market (and not just in financials – deals coming to market in variety of sectors, inc. commodities, energy, casinos, etc) – May is already the busiest month ever for follow-on offerings; Since the beginning of the year, sales have reached $54.9 billion, making it the busiest period since 2000. In the first days of May, U.S. companies have sold $28.9 billion of shares and convertible bonds, a contrast to the $6.5 billion of sales in all of March (WSJ)

    · Washington – NYT/WSJ says White House planning sweeping compensation limits for Wall St; House panel reaches deal on cap-and-trade/climate control, which WSJ says has good chance of getting through broader Senate/House; the NYT says only 6% of stimulus bill cash has actually been distributed and most of that has been to social services (i.e. not all those “shovel ready projects that were supposed to create jobs); Sen Dodd says credit card legislation that is produced from the Senate may inc. a cap in rates

    · M & retailers – Macy’s kicks off retail earnings season on a downbeat note; bunch more reports due to come from this space over the next few weeks

    · Credit – S&P today notes that the volume of rated debt affected by first quarter’s defaults was a massive $541.2 billion–the largest quarterly amount on record (dating back to the first quarter of 2000); according to S&P, “If the pace set in the first quarter is maintained through the remainder of the year, defaults would total 248 in 2009, the largest number on record, dating back to 1981.” (S&P).

  85. 85
    zman Says:

    Man, Goldman is about as out of sync as I’ve seen them, recall they raised targets and ratings on just about everything in the energy space Monday morning after having been somber all Spring. Their relevance in energy land has gotten shelled in the last 12 months, in my opinion as an observer of them vs energy over the last 15+ years or so.

  86. 86
    tater Says:

    Thanks. My question wasn’t clear. Do you think the 30’s would trade high enough that they could be sold at .15 if CLR were to trade at 27.50 by Thurs afternoon?

  87. 87
    BirdsofpreyRcool Says:

    1520s — thanks. There is much to look at these days. So much so that, like z, I have taken some trades off and am sitting in some cash. Waiting in the weeds, if you will, for something juicy to go wandering by.

  88. 88
    zman Says:

    Re 86. No, I don’t think 27.50 would give you a $0.15 bid on those calls.

  89. 89
    zman Says:

    Re this above:
    Washington – NYT/WSJ says White House planning sweeping compensation limits for Wall St

    Are they talking about for firms that took TARP?

  90. 90
    zman Says:

    By the way, have not updated multiples on the dry bulks in awhile. Articles like the one at the bottom of the post just keep helping me to put it off. SEA down 8% today.

  91. 91
    tater Says:

    Thank you

  92. 92
    1520sbroad Says:

    #87 – agreed lots of variables to try to factor in. My thought on the set of C preferreds to be converted is that much of the fast money crowd has been in and come back out with a tidy profit and now there is a chance to actually go in and capitalize on the actual conversion premium rather than the momentum.

  93. 93
    zman Says:

    Never mind 89, got my answer here:


  94. 94
    BirdsofpreyRcool Says:

    1520s — personally, I think I am done with the financial services sector for a while. The “easy money” has been made on the upside and, since I don’t want to fight the Fed, I don’t want to short on the downside. I think energy might get cheap over May, June, July… as it usually does. Also, I think GM is about to file BK. If we see the kind of shenanigans and disregard/strong-arming of private capital law, I think the mrkt will react badly to that. The market SHOULD react badly to that.

    So, I’m not much help on the financials right now. I defer to your expertise!

  95. 95
    BirdsofpreyRcool Says:

    1520s — ha! guess that makes me part of the “fast money” crowd? Not where I usually, play, by the way.

  96. 96
    zman Says:

    Reuters has the gas storage report at 100 Bcf for tomorrow, range of 88 to 105. That would be a little light by my estimation but I think analysts are taking into account more cooling load as it was hotter than normal. Also, imports were lower. I would not be surprised by any number between 90 and 115. Anything over 105 probably causes a bit of a pull back in gas.

  97. 97
    zman Says:

    Somebody wake me when they see the rally monkey.

  98. 98
    1520sbroad Says:

    BOP – i hear you. financials make me queasy and i have no expertise. Chrysler and Government Motors are even more discouraging.

    nothing wrong with cashing in some fast money once in a while. i’m sitting covered in the money on most of my energy stuff waiting for the next move.

  99. 99
    BirdsofpreyRcool Says:

    1520s — I can honestly say that this is the first time in my life that I bought into the financial sector. But, I used to do “distressed investing” professionally for a while… so, know that one is occassionally rewarded for picking thru a train wreck, trying to keep the big picture in mind.

    I like “fat pencil/back of envelope” investing. Once it takes a spreadsheet and numerous small assumptions to make an investment decision work, that’s just too tough for me. If you can hit the investment thesis with a sledgehammer… and it still walks upright, that’s the kind of stuff I like.

  100. 100
    1520sbroad Says:

    covered calls are my fat pencil.

  101. 101
    BirdsofpreyRcool Says:

    HT’s gut says it’s time for a mrkt bounce.

    HT’s gut thinks it’s ALWAYS time for a beer, tho. So, have to keep that in mind.

  102. 102
    zman Says:

    I like him more and more.

  103. 103
    BirdsofpreyRcool Says:

    1520s — Here’s to us Fat Pencil Investors! And long live the cocktail napkin!!**

    (** Art Laffer reference)

  104. 104
    BirdsofpreyRcool Says:

    HY playing along with HT’s gut. Back over 80 again.

  105. 105
    tater Says:

    Added FSLR, EOG

    FSLR too tough to call, but the chart gives some landmarks.
    EOG looks to have found some support around 70.

  106. 106
    zman Says:

    Thanks T – was just taking a look through the solars, thought on FSLR is I like it closer to $150 and think it gets sold off in the $190s. Need more deals for them to break into the $200s. Next 2 quarter should be a good ones for getting the cost per watt down but they have some higher cost guidance that could hold a run into earnings back. Of course, earnings are over 2 months away. When I jump back into solar, it will still be with them.

  107. 107
    tater Says:

    Closed the Whole Foods short. Now I’m sure that they will report that “things don’t suck as bad as the analysts thought they would suck” and the thing will pop. Harley’s and Whole Foods. Just don’t see those two doing well as the thing formerly know as socialism takes over.
    (BOP, I’m trying to stir your drink!)

  108. 108
    BirdsofpreyRcool Says:

    tater — i’ll take that shaken, not stirred… two olives, and a little dirty, pls! 😉

  109. 109
    tater Says:

    Whoops, financials just fell further out of bed. Wonder if that might push us into a goofy last 20 minutes.

  110. 110
    Dman Says:

    Z – I’ve been wondering lately about recent outperformance of SU versus COS. Any ideas?

  111. 111
    zman Says:

    Dman – I don’t follow COS so I’d be guessing. VTZ might want to jump in there.

  112. 112
    BirdsofpreyRcool Says:

    HY index falls back under 80. Too bad.

    HY 79.875

  113. 113
    zman Says:

    Looking to come out of the CRR trade, just hard to fight the short covering there and let the thing actually fall. Offering now but I doubt I get taken out, not willing to hit the bid on something with that fat a spread with so much time left on the puts.

  114. 114
    BirdsofpreyRcool Says:

    HT’s gut needs a realignment, it seems…

  115. 115
    VTZ Says:

    SU is just catching up… it took a while to digest the SU takeover/merger of PCA and keep in mind COS rallied from 18 to 30 in a a little more than a month.

    COS was outperforming due to takeout speculation after the Total UTS bid. OPC has also gone from 0.60 to 4.00 because people think that they are going to be able to repay their debt now that oil is 60. They are also a takeout target by NXY, I’m of the opinion that the Nexen CEO saying that they aren’t looking at acquisitions is just talk.

  116. 116
    zman Says:

    DNR on the tape selling 60% of its Barnett reserves, will try and track down the $/Mcfe on that deal for reference.

  117. 117
    BirdsofpreyRcool Says:

    End of day Credit Indices —

    IG 154 1/2

    HY 79 13/16

  118. 118
    elijahwc Says:

    FYI After the Bell:

    DNR Denbury Resources agrees to sell 60% of its Barnett Shale assets for $270 mln (16.18 -0.89)

    Co announces it has entered into an agreement to sell 60% of its Barnett Shale natural gas assets for $270 mln to Talon Oil & Gas LLC, a privately held company. The sale is expected to close in late June and is subject to satisfactory completion of customary due diligence and closing conditions. The agreement contemplates an effective date of June 1, 2009, and consequently operating net revenues after June 1, net of capital expenditures, along with any other purchase price adjustments, will be accounted for as an adjustment to the ultimate sales price. The purchaser will operate the properties after a transition period following closing. As part of the transaction, the purchaser is acquiring a portion of the Co’s natural gas swaps. The Co will be transferring to the purchaser natural gas swaps for 2010 totaling 16 MMcf/d at an average price of approximately $5.65 per MMBtu and natural gas swaps for 2011 totaling 13 MMcf/d at an average price of approximately $6.16 per MMBtu. The purchaser will pay the Co at closing for the agreed upon market value of these derivative contracts on the date of the sales agreement, or if such amount is negative, the purchaser will be reimbursed by the Co.

  119. 119
    VTZ Says:

    The other thing Dman is that Suncor’s April production number was fairly good as well.

  120. 120
    BirdsofpreyRcool Says:

    Another credit market must-read. This was making the rounds of institutional trading desks today.

    How stealing Chrysler threatens our markets

    By Vitaliy N. Katsenelson

    On May 1, the United States took a drastic step toward becoming Russia. Not Russia at its best, not the motherland of Dostoevsky, Tolstoy, Rachmaninoff…

    Instead, Russia at its worst, the one that in 1917 took from the bourgeois and gave to the working class; the one that signed contracts with western oil companies in the 1990s when oil prices were low and then — in 2007 when oil prices skyrocketed – blatantly and unilaterally “renegotiated” those contracts.

    Wielding the public’s empathy as a weapon, President Obama took Chrysler from its rightful owners: secured loan holders (a.k.a. TARP-tainted banks, the “evil” hedge funds, faceless pension funds). And he gave it to struggling, very sympathetic, $40-an-hour earning (including benefits, this is not a typo), blue collar workers — Chrysler’s employees and the United Auto Workers union. Chrysler, simply, was stolen from its rightful owners.

    Fixed-income investors spend an enormous amount of time studying bond covenants, which spell out how assets are disbursed in the event of a bankruptcy. Secured senior lenders have dibs on the secured assets; unsecured, junior bondholders and loanholders follow (as a part of leveraged buyout Chrysler had no unsecured outstanding bonds or loans); unions and employees are next in line; and equity investors get whatever is left, which in this case would be almost nothing.

    The White House fish-fry

    For two hundred years our country has had a well functioning bankruptcy-court system that was designed to make sure that division of assets is equitable. Now that system is threatened. The banks, the ones that received billions of Federal funds, were forced to give up their legal ownership first. Were they told they would fail the recent stress tests (which they recently passed) if they didn’t give up their rights? Or maybe their CEOs were told they’ll be fired if they did not go along? These days you don’t have to be a conspiracy theorist to make these accusations. After all, then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Benjamin Bernanke used the latter tactic to get Ken Lewis, CEO of Bank of America, to lie to his board and shareholders about the purchase of imploding Merrill Lynch. We may never know what happened, but I’ll promise you this — banks did not walk away from
    billions of dollars of the desperately needed money, not at their own will.

    After the big fish were fried, President Obama went after smaller loan-holders — he called these hedge funds and pension funds “speculators” — who put up a
    fight. Those institutions were not tainted by TARP money, thus the president had to use populist rhetoric,
    saying that they “endanger Chrysler’s future by refusing to sacrifice like everyone else.” He turned public opinion against the loan-holders, whose only fault was that they financed the dysfunctional automotive sector for too long and maintained fiduciary duty to their investors by attempting to collect what was legally due.

    President Obama is popular and hedge funds are not.

    Thus as the financial and political costs became too high, these smaller fish jumped into frying pan with the
    banks. The fact that these pension funds and hedge funds invest money for regular folks like you and me is ignored. Average Joes aren’t paying close enough
    attention to catch that little detail; and unlike the UAW, they did not bankroll Mr. Obama’s campaign.

    Losing the empathy contest

    The consequences of what took place May 1 are not immediately apparent, but there are consequences. Forget about right or wrong, forget about politics: If any other President had done what Mr. Obama did you would have been reading the same thoughts from me.

    The rule of law, the bedrock of our system was chipped last week. Instead of company ownership being redistributed based on the provider’s place in the
    capital structure — as the law requires — the asset redistribution took place based on a very subjective
    criterion, empathy. Banks, hedge funds and pension plans don’t win empathy contests these days, especially when competing with down-and-out workers.

    President Obama’s actions will have a twofold impact:

    * First — and this is certain — they impaired auto companies’ ability to borrow from the fixed income market for at least a generation, and that’s regardless of whether they have secured

    A fixed-income investor, when pricing a
    security, makes certain assumptions of
    recovery based on the collateral and its place in the capital structure in the event of bankruptcy. The better the collateral and the closer it is to the front of the capital structure, the less money they stand to lose, and thus the lower the interest rate they expect to
    receive. In the case of Chrysler, loan holders expected to recover around 70-80 cents on the dollar if the letter of law was followed. After the company was given away to UAW, however, that number dropped to 29 cents.

    Would you buy an auto company’s bonds in
    your retirement account if you knew that this industry often flirts with death, the rule of law is suspended and empathetic workers take your money if/when things go wrong?

    * The second impact is more significant to the US economy, but will depend on future government actions. If the empathetic distribution of wealth stops with the auto industry, investors may look at it as a one-off deal, specific to the dysfunctional auto industry. But if Mr. Obama repeats this even once outside of the auto industry — and he’ll
    have plenty of chances as we are in a
    prolonged recession — the political risk of the US will increase. Lenders, be it bond or loan holders, will lower recovery assumptions for even very secured assets, and the risk premium and thus borrowing costs will rise for
    all companies.

    Empathy is an honorable emotion, we feel bad for people losing jobs, but changing the rules, in this case the law, in the middle of the game in most developed
    countries would be considered criminal, shortsighted and not good for the system. If you don’t trust the rules, you cannot play the game. I hope our president stops while he is behind.

    Vitaliy N. Katsenelson, CFA, is director of research at Investment Management Associates in Denver, Colo., and he teaches a graduate investment class at the University of Colorado at Denver.

  121. 121
    BirdsofpreyRcool Says:

    tater — smart move on that Whole Foods short. Your intuition was correct.

    Perhaps you can have a talk with HT’s gut…

    WFMI up 10% in a/h after reporting better-than-expected bad earnings.

  122. 122
    tater Says:

    Looks like I’ll have to get back on that once the squeeze settles. That sure has been the theme to this earnings season. “We suck and our business is way off from last year, but man, those analysts sure went overboard, didn’t they? Heh, heh, heh.”

    We’ve got a store close by. Though I am sure it is not indicative of the whole chain, it’s empty. Pin-drop empty.

    HK – Cleaning up the chart, noticed the lame volume during this sell-off. Just wanted to point it out.

  123. 123
    Dman Says:

    Thanks V.

    I had been looking at a 6 month period, but if I compare SU & COSWF over a 1 year period, they are very close, with a bit of catching up recently by SU, as you say.

  124. 124
    Dman Says:

    BOP – #120

    I agree with their statement that “The rule of law, the bedrock of our system was chipped last week”.

    I agree that this will have far-reaching consequences.

    I disagree with the implicit (but unstated) assumption that the “bedrock” was in pristine condition prior to the Chrysler event.

    Did bondholders fail to notice that the rule of law had already long been suspended in Washington?

    After all, it is the very same “bedrock” that is supposed to ban torture. Yet torture was committed, with full knowledge the Executive branch (on their explicit orders in fact).

    The Executive was clever enough to keep the Dems in Congress informed of their blatant lawbreaking (of which torture was just the icing on a very large cake), astutely guessing that the gormless Dems would simply keep quiet, thus implicating themselves in the sordid misdeeds.

    The Dems, as expected, did remain mute and thus allowed themselves to be fully implicated in a rather impressive range of lawless activities. And now they are in charge, do you think *they* want to investigate the lawlessness?

    This is all illustrated by the irony of Jane Harman’s shrill complaints about being caught on a *legal* wiretap when she spent the last 6 years looking the other way on the *illegal* wiretapping of her constituents.

    So a culture of impunity in Washington, fully supported by the media, simply permits politicians to override the law when the feel like it, with full confidence that they won’t ever pay a price.

    This is where Mr Obama gets the idea that he can crush the bondholders: the idea of official lawlessness and impunity has been all around him for his entire time in Washington.

    The analogy in #120 with Russia is valid. I once again would point out the work of Dimitri Orlov, who pursues an analogy between the US & the USSR, with a key element being the corruption and incompetence of the political elites:


  125. 125
    VTZ Says:

    Dman, another potential cause for COS outperformance on the way down is the fact they had a good yield until it was slashed in November.

    If you chart the 1 year and the 6 month, the point in November when COS slashed their dividend to 1/5th of what it was, is the point where Suncor outperformed and COS was pulled down to where it would have been without the fat payout.

  126. 126
    Dman Says:

    V – #125: interesting. I wonder what price for crude would persuade COS to bump up the dividend again?

  127. 127
    RMD Says:

    “Those who read my daily commentaries have seen two important recent projections. The first of these call for the Dow to be at 9,000 or higher on July 9, 2009. The second one calls for the Dow to be at 10,000 by this Christmas.”
    Joseph Granville’s The Granville Market Letter, PO Drawer 413006, Kansas City, MO 64141
    “For Traders Only:
    Short The Major Stock Market Indices, Now!
    Be long gold until May 14-18,
    Then short GOLD!
    Remember that markets CAN DO ANYTHING, and keep protective Stops on All positions.” (8-May-09)
    Arch Crawford’s Crawford Perspectives http://www.CrawfordPerspectives.com

  128. 128
    zman Says:

    ZTEXT Update:

    We didn’t flip the switch today as advertised so don’t think it didn’t work, we just did not send. We will start sending out the ZBLASTs tomorrow as text messages (in addition to sending it to your email address) to those members who have asked to be on the list.

    If you want to be added to the list please send an email to zmanadmin@gmail.com

    Subject line: TEXT ME

    with your user name
    cell phone number with area code
    and cell carrier.

    Please note that while this service is provided free of charge from ZEB, there may be additional charges from your carrier depending on your data plan. Have a nice night.

  129. 129
    bill Says:

    i like the dnr move as it makes the company more oily

    I own it and pxp

    Rumor has it that mmr had a dry hole at amazzo–pxp is in this as well

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