11
Jun
Thursday – Natural Gas Preview and Oil Inventory Review
Thoughts On Oil Prices Vs Oil Estimates For 2Q09. As we approach the time when analysts will be marking their models to the market price for oil and natural gas, it is clear that the oilier names will be seeing upward revisions (disregarding hedges for a moment) while the gas exposed will be seeing quite the opposite.
- Analysts Consensus Estimate for 2Q09: $50.50. This is the median WTI price flowing through the Street's models
- Quarter to Date Oil Price: $56.28
- 2Q09 If Oil Prices For The Rest of the Quarter Average:
- $60 = $57.17 (doesn't look likely with oil over $71 now)
- $65 = $58.36 (I'd call this the conservative case with about 2 weeks to go in the quarter)
- $70 = $59.55
- $60 = $57.17 (doesn't look likely with oil over $71 now)
- So it is more than likely analysts will flowing almost $8 per barrel more through their models at least for the second quarter over the next 2 weeks or so (they try to get the marking to market process done by the first week of the next quarter so say they wrap it up just after the July 4th holiday)
- Who will be affected in a positive way? The obvious names are the oil leveraged and oil unhedged.
- Amongst the mid and small cap E&Ps
- CLR comes to mind first: 75% oil, completely unhedged. This one should see the biggest % boost to CFPS estimates of the names I track
- WLL - 74% oil; 40% oil hedged 2009; 33% of oil hedged 2010
- DNR - 69% oil; 59% oil hedged 2009 with a $75 floor;
- PXP - 62%oil; highly hedged 2009 and 2010
- BRY - 55% oil; 90% of oil hedged 2009; 75% of oil hedged 2010
- PXD - 43% oil; 45% of oil hedged 2009; < 10% for 2010
- NFX - 30% oil; a little over half hedged and that well over $100
- CLR comes to mind first: 75% oil, completely unhedged. This one should see the biggest % boost to CFPS estimates of the names I track
- In the big caps
- APA - 51% oil
- APC a distant second at 29% of production from oil
- EOG at just 21% but the percentage is growing, it's all in the U.S. so its getting better prices than some of its peers international prices, and it remains unhedged for oil.
- APA - 51% oil
- Amongst the mid and small cap E&Ps
Other Names I'm Holding Now That May See Some Upside to 2Q Numbers:
- WRES - 55% oil, low hedge prices in 2009; unhedged in 2010.
I've included the following table for tracking purposes; as we move towards 2Q09, I would expect the less hedged names to see significant upward revisions to at least the 2Q09 estimates.
Die Speculators Die Watch: Senator Bernie Sanders is introducing legislation that would attempt to limit moves in the price of energy commodities. His legislation directs the Commodities Future Trading Commission to use its emergency powers "to stop sudden or unreasonable fluctuations or unwarranted changes in prices". The bill would limit the number of "oil and gasoline contracts" that an energy trading firm could own. Sanders quotes:
"Despite the record supply of oil and reduced demand, prices are going up, not down,"
ZComment:
The market (SP500) is up 41% from the 2009 lows having fallen 58% from its peak in 2008 to its worst point in 2009. The SP500 is now trading at 60% of its peak 2008 levels.
Crude is up 70% from its 2009 lows, but crude fell 71% from 2008's highs and is now trading at 49% of those levels.
Perhaps Bernie should regulate the price of stocks as well since they are outperforming crude. Ugh.
- "The last thing people need now is to be ripped off at the gas pump because speculators on Wall Street - some of the same people who received the largest taxpayer bailout in US history - are allowed to jack up oil prices through price manipulation and outright fraud,"
ZComment: Fraud? What fraud? Unless you mean the EIA saying prices are too low to support further growth in supply and that it along with IEA sees global demand increasing again next year.
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Natural Gas Preview
- EIA Oil Inventory Review
- Stuff We Care About Today - deal watch
- Odds & Ends
Holdings Watch:
- $10KP: $30,500 / 37% Cash
- No trades yesterday but I will be looking to raise cash again in short order.
Commodity Watch:
Crude oil rallied after the EIA posted somewhat bullish (see breakout section on inventories below) ending the day up $1.32 at $71.33. Crude looks a bit extended to me but I'm no TA guy and the forward looking futures market always swings too far too fast at some point and we could easily go to $80 before we see low $60s (I think that's the near term floor) again. This morning crude is trading around the $72 mark on IEA comments and a weaker dollar.
- IEA Watch: IEA raised its estimate of 2009 global oil demand from an expected decline of 2.57 mm bopd to one of 2.46 mm bopd. Its a small increase, coming on the heals of a 10,000 bopd increase by EIA, but it is the first time since August 2008 that the group has bumped UP its demand forecast. Sorry Mr. Sanders.
- Iran Watch: Elections are tomorrow. A defeat for Ahmadinejad is possible and all three of his opponents have been dubbed "less abrassive" to the West.
- Iraq Watch: Iraq's Southern Oil Company, said it plans to expand oil production by between 350,000 and 500,000 bopd from a current 1.77 mm bopd (from the southern part of the country) within 2 years. Welcome news for HAL, SLB, BHI and WFT which are vying for the necessary work. Also note that we are seeing a number of OPEC countries talk up production increases over the last couple of weeks. This bears watching as it will be likely to soon put the brakes on the oil rally.
Natural gas closed off a couple of pennies at $3.71 and the gassier stocks were noticeably weaker than the rest of the energy complex fearing another super-sized injection today. This morning gas is trading up slightly pre natural gas inventories.
- Tropics Watch: All quiet on the tropical front.
- More Voices Calling For Higher Natural Gas: This kind of story is making the rounds with more frequency in recent days. My points on higher natural gas prices has been a function of :
- Lower production, "not if but when" as it will happen given the U.S. decline and persisting low activity levels.
- Weak Canadian imports: ---they've got their own set of issues with declining production and increasing demand.
- LNG wildcard - just not showing up despite repeated calls for a "tsunami of gas" to flood U.S. shores. I have little doubt imports will increase here but not enough to offset the coming declines in late 2009 and 2010 in domestic production.
Natural Gas Preview
My number: 115 Bcf Injection
- History:
- Last Week: 124
- Last Year: 84
- 5 Year Average: 87
- Last Week: 124
- Weather: cooler than normal but building next week.
- Imports: inline with the prior week, short of last year's number by 0.8 Bcfgpd, probably not enough to notice yet in the face of continued strong production and weak demand.
Street Consensus: 110 Bcf Injection
ZComment: Gas is likely to rally but in an unsustainable fashion (not more than a few days) on a number of 110 or less. I don't expect this "good" a number today but I would expect near term, more summer like forecasts to be supportive of current gas price levels even if they don't push for higher prices. I do expect the first tropical depression coming anywhere near the Gulf to prompt a brief but sharp short covering rally here.
EIA Oil Inventory Review
ZComment:
CRUDE OIL - Bigger than expected draw down of inventories, once again correctly foreshadowed by the Tuesday afternoon inventory release by API. This was what I call a "poor quality beat" meaning it was supply (imports) driven and not demand (inputs) driven. So it's positive in that inventories retreated but we are still not seeing significant signs of a demand recovery, and in crude, we are unlikely to see that recovery until we see a string of several weeks of rising gasoline and distillate demand...so far no joy from either component.
Imports: If we call last week's bump an anomaly it almost looks like a trend is forming with imports hugging the low end of the seasonal range. Blame logistics of unloading in the Gulf for the lumpiness and perhaps recovering Chinese and Indian imports for the low to trend imports of late.
GASOLINE - Unexpected, unseasonable draw down on stocks. There was some oddness in last week's numbers with a much sharper than expected decline in demand from the highs seen around the starting day of driving season.
Prices Are Up But Still Well Below Year Ago Levels: Gasoline prices may be up 55% year to date but consider that they are still down 35% from year ago levels. They normally rise 25 to 35% from New Year's Eve to early summer. This year the rally is bigger because they had fallen so far from the September/October highs. If we look at consumption of 9.1 mm bpd of gasoline this year vs 9.4 mm bpd a year ago and apply current retail average prices of $2.62 per gallon and $4.04 per gallon respectively, that comes to an average daily cost of $24 mm per day this year and $38 mm per day at this same time last year. Suddenly it does not seem so crushing a burden for the consumer.
DISTILLATES - Still swollen, need to see more trucks rolling, so far no joy there.
Stuff We Care About Today
Deal Watch: More signs of the road to recovery in group with asset deals and more debt and equity offerings.
- EVEP Buys Into Austin Chalk
- Small deal $12.2 mm for 9 Bcfe reserves. Sounds fairly price impacted and it's a small deal so I dont put a lot of stock in the low $/Mcf acquisition cost here but a good bolt on for (EVEP).
- PVA Senior Deal: $300 mm, 10.375% couplon notes, priced to yield 11%.
- ATPG files a 7.25 mm share offering (23% dilutive if the green shoe is exercised)
- proceeds to be used to fund development of a deepwater Gomex discovery
- The company is highly leveraged and this deal would bring their debt to equity ratio down to 69% from 73%.
- Just coming up to speed on the name, no strong thoughts by me either way yet, but I've got a file open here now, again expect to see something next week.
Odds & Ends
Analyst Watch:
- (SLB) started at Buy at SocGen
By Nick Heath
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)–Crude oil futures traded above $72 a barrel to their
highest levels since October Thursday after the International Energy Agency
revised its outlook for global oil demand upwards for the first time in 10
months.
Emergence of gentle signs that an uptick in economic activity is breathing
some life back into oil consumption prompted the IEA to revise its global oil
demand forecast 120,000 barrels a day higher to average 83.3 million barrels
day in 2009.
The outlook chimed with nascent market optimism of economic recovery that has
helped oil prices more than double in the space of six months. However, the IEA
stressed that the demand outlook, while slightly better, remains constrained,
and is expected to languish 2.5 million barrels a day below 2008 levels.
“It’s a fairly modest revision. Some first and second quarter (macroeconomic)
data is looking slightly healthier than we expected but it’s still very early
days,” said David Fyfe, editor of the IEA report.
At 1254 GMT, the front-month July Brent contract on London’s ICE futures
exchange was up 52 cents at $71.32 a barrel.
The front-month July light, sweet, crude contract on the New York Mercantile
Exchange was trading 75 cents higher at $72.08 a barrel down from an earlier
seven-month high of $72.30.
The ICE’s gasoil contract for July delivery was up $6.75 at $585.25 a metric
ton. The June contract was up $11.50 at $576 a metric ton when it expired at
1100 GMT.
Nymex gasoline for July delivery was up 197 points at 203.50 cents a gallon.
Thursday’s IEA data boosted demand hopes that were already burnished by weekly
U.S. inventory data Wednesday. Those readings revealed a drop in U.S. crude and
products supplies last week, while gasoline demand rose 1.3% from the previous
week.
“(The data) certainly is better than it has been in the past. It’s offering
something to people who are watching for demand,” said Simon Wardell, analyst
at Global Insight in London.
The IEA was the second agency this week to revise upwards it demand outlook,
with the Energy Information Administration Tuesday also raising its projections
for the year. However, economic conditions are still fragile many pointed out –
and not helped by oil prices rising sharply in recent months – while global oil
inventories continue to hold above long-term averages.
“If you look at fundamentals it’s difficult to justify even though we had
supportive statistics yesterday. But the fact remains stocks are high and
demand is weak and don’t justify prices at this level,” said Christophe Barret,
global oil analyst at Calyon in London. “When you look at hard macroeconomic
data it is still very weak. The danger (for the oil price) looks on the
downside.”
A U.S. Federal Reserve survey released Wednesday showed that economic
conditions in the world’s largest economy remained weak and even deteriorated
in many regions of the country as recently as last month. Some of the 12 Fed
districts see the recession easing a bit, but they are still not expecting a
significant boost in economic activity in 2009.
Nonetheless, investors found fundamental support in Chinese data out earlier
Thursday. China’s crude oil imports in May unexpectedly hit the second-highest
level on record, touching 17.09 million metric tons or around 4.04 million
barrels a day, according to preliminary data from the General Administration of
Customs Thursday. Many hopes of a recovery for oil demand center on the world’s
second largest consumer of crude, and market participants are looking ahead to
industrial production data due from China Friday for clues.
Crude prices continued to take support from other financial markets Thursday.
The dollar was weaker against most major currencies, triggering inflation and
currency hedging buying, while European bourses were broadly stable.
-By Nick Heath; Dow Jones Newswires (Spencer Swartz in London contributed to this item)
Dow Jones Newswires
June 11th, 2009 at 7:50 am06-11-09 0817ET
By Peter Brimelow
A DOW JONES COLUMN
Oil bubbles back. And an oil bull is charging again … but mainly at gold.
Oil traded above $71 a barrel Wednesday, a seven-month high. Its surge is even
being blamed for the stock market’s softness over the last several days.
And this is something of a vindication for a battered oil bull, Outstanding
Investments, which is edited by Byron King. OI profited dramatically from the
oil-price surge last summer and even got presciently worried at the top.
It was badly damaged by the Crash of 2008. But when I last looked, OI was
confident that oil would rebound.
Over the year to date through May, Outstanding Investments was up 27.8% by
Hulbert Financial Digest count, versus 4.1% for the dividend-reinvested
Wilshire 5000 Total Stock Market Index.
But, indicative of the damage done by the crash, over the past 12 months OI is
down 39.05%, slightly worse than the negative 32.63% of the total return
Wilshire 5000.
Reflecting on that damage further, over the past three years the letter has
eked a 0.25% annualized gain, compared to negative 8.18% annualized for the
Wilshire.
Sure, you would have done better in T-bills, but you wouldn’t have had the
upside potential. And that can be large: Over the past five years, the letter
has achieved an 18.2% annualized gain, against a negative 1.26% annualized for
the total return Wilshire 5000.
OI continues to be bullish on oil, although calmly. Its latest issue features
a powerful argument in favor of StatoilHydro ASA (STO), the world’s largest
deep-sea driller, which obviously requires high energy prices to make its
astonishing and expensive activities viable.
Noting that the company was beaten down by the Crash of 2008, OI says its
current price puts a value of “just over $3 per barrel of oil -equivalent
reserves, plus the skills and technology to exploit them. You won’t find oil
and technology at a cheaper price than that.”
What does excite OI right now is evidence that the Chinese are making direct
investments in energy and resource producers around the world. For example, OI
notes that massive off-shore exploration by the Brazilian government-owned oil
company Petrobras (PBR) is being financed by China.
OI writes: “In essence, we are witnessing the end of the post-World War II
economic construct of the world’s financial system. … The Western financial
crisis handed well-capitalized, government-backed Chinese banks and industrial
firms an unmatched competitive advantage. With the traditional credit markets
dry, Chinese banks have transformed into key lenders for the resource
developments that will fuel the next generation of humanity. Indeed, for now,
the Chinese are the world’s only lenders for large resource development
projects.”
(OI does suggest that FMC Technologies Inc. (FTI) will manufacture much of the
equipment.)
And OI is particularly concerned by what it sees as the coming collapse of the
bond market:
“Remember back in March, when the Federal Open Market Committee made a
surprise announcement that it would spend Treasury funds to support long-term
government bonds? … This last-gasp financial plan to purchase and support the
Treasury market was and is, at best, a short-term fix to prevent the bubble of
all bubbles from bursting.”
Presumably as a result, all five of OI’s other top choices this month are
precious-metals stocks: Agnico-Eagle Mines Ltd. (AEM.T); Kinross Gold Corp.
(KGC); NovaGold Resources Inc. (NG.T); AngloGold Ashanti Ltd. (AU); and Hecla
Mining Co. (HL)
(Peter Brimelow is author of “The Wall Street Gurus: How You Can Profit From
Investment Newsletters.” He writes for MarketWatch.)
Dow Jones Newswires
June 11th, 2009 at 7:53 am06-11-09 0819ET
Credit Markets not signalling a trip back to the abyss. Trading Desk says everyone asking “is this it? is this the mrkt breakdown?” HeadTrader doing a lot of hand-holding and comforting scared equity guys. Trading Desk watches the bond mrkt too… We think “no.” Credit Market indicating move to stabilization. But, time will tell, of course.
IG 128 1/2
HY 84 1/4
June 11th, 2009 at 8:05 amTechTrader made a scary amount of money yesterday… twice. He shorted the morning rally and covered. Then shorted the midday rally and covered. TechTrader will be a positive data point on new car sales soon.
TechTraders comments for today — 80/20 to short today and a good trending color day. highs are usually in the morning and usually in the first 30 minutes. But most likely will have a quick rally. Lows are usually made in the last hour but there will be a bounce after lumch. Summary….patterns suggest going Short on morning rally for a sell off into lunch and into last hour
June 11th, 2009 at 8:09 amAll eyes turned from watching jobless claims which at 601K didn’t get the desired 500 handle but were better than the forecast 615 and retail sales, which were ok but include a bump for gas stations and are now warily eying the 30 year auction this afternoon.
Art Cashin also made a good point about Bernanke getting smeared during this B of A testimony as a possibility and a negative for the market.
June 11th, 2009 at 8:10 amre 4 = LOL, its a traders market for sure.
June 11th, 2009 at 8:11 amZ thanks for the oily names..timely too as i want to increase exposure to oily names.
Regarding PXP hedges, they have oil puts..so those puts value declines as the commodity rises but they have upside 100 % unhedged. Using your numbers above, q2 avg prices will be at least 20 dollars per bbl higher than q1. PXP produces over 50,000 bopd so thats another 1 m per day cash flow, 90 m qtr 75 to 80 cent pps.
Another thing (positive for PXP and maybe others) with higher prices is proved reserves goes up, as they took tremendous year end write downs for qty of reserves and values due to price revisions, this will mean a lower dda next year
VQ is another one that should be on the watch list.
June 11th, 2009 at 8:16 amFile under FWIW — Steve Leisman’s explantion and definition of “inflation” this morning fits my own. Hopefully, he explained it better than I have on this board. But if Ben B had spent less time worried about the inflationary affects of high oil prices last summer, Lehman wouldn’t have collapsed and we would not have been standing on the edge of the Abyss for 6 months.
June 11th, 2009 at 8:16 amBill – thanks and I went very simple on it as I didn’t calculate sensitivities on CFPS per $1 price increase in crude. Good and valid points on PXP. I think the analyst crowd will be highgrading their buy lists in the next 3 weeks before earnings.
I’ll had VQ and EGY to the weird little names list with WRES. WRES actually won’t get a lot of benefit from higher prices on the income statement at this time due to some underwater hedges (unfortunately not collars or floors but swaps) but it will benefit from the general increased sentiment on the oil names and since I liked the story when the stock was in the teens (and nothing has really changed but a deceleration of spending due to prices) you can imagine that I like it here as they anticipate upward revisions to reserves this year.
June 11th, 2009 at 8:28 amBy Christine Buurma
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–Natural gas futures were choppy Thursday ahead of
government data expected to show a larger-than-average build in inventories for
the week ended June 5.
Natural gas for July delivery on the New York Mercantile Exchange was trading
2.3 cents, or 0.62%, lower at $3.685 a million British thermal units after
opening floor trade 2.5 cents lower at $3.683/MMBtu.
Mild weather and weak demand during the recession are expected to result in a
sizable build in gas in U.S. storage. Analysts and traders surveyed by Dow
Jones Newswires predict that the U.S. Energy Information Administration will
report that 110 billion cubic feet of gas were added to storage during the week
ended June 5, above last year’s 84 bcf injection and the five-year average
injection, which was 91 bcf.
“We’re just treading water ahead of the storage numbers,” said Cameron
Horwitz, an analyst with SunTrust Robinson Humphrey in Houston. “Inventories
are pretty bearish compared to last year.”
If the storage estimate is correct, inventories as of June 5 will total 2.447
trillion cubic feet, 22% above the five-year average and 31% above last year’s
level.
Forecasts of continued mild weather in the major gas-consuming regions were
placing downward pressure on prices Thursday. The National Weather Service was
expecting mostly normal temperatures across the upper Midwest and Northeast
from June 16 to June 24, with above-normal temperatures in the Southeast and
South Central regions.
“Weather forecasts continue to indicate above average temperatures in the
11-15 day period in areas stretching from Texas to the Southeast, but [revised
forecasts are] lowering the chance that cooling demand needs will rise
materially in the second half of this month,” analysts with Tradition Energy in
Stamford, Conn. wrote in a note to clients Thursday.
-By Christine Buurma, Dow Jones Newswires
June 11th, 2009 at 8:38 amDow Jones Newswires
06-11-09 0935ET
BOP – you still following URKA? Saw some news about one of their domestic competitors Silvinit raising domestic (Russian) prices. This is a net positive for URKA – in my opinion this means that URKA and Silvinit aren’t going to cut each others throats domestically while they wait for the china/india price negotiations. The citi russian analyst Daniel Yakub commented yesterday about it.
June 11th, 2009 at 8:38 amBEIJING (Dow Jones)–Paul Volcker, chairman of U.S. President Barack Obama’s
Economic Recovery Advisory Board, said Thursday it is reasonable to expect that
the U.S. will show “some growth” late this year and next year, but warned that
a strong recovery is unlikely.
Addressing a financial forum in Beijing, the former chairman of the U.S.
Federal Reserve said the U.S. faces “a long slog, with continuing high levels
of unemployment.”
Volcker, known for successfully bringing inflation under control during his
term at the Federal Reserve, said the current economic situation “is not an
environment in which inflationary pressures are at all likely for some time to
come.”
“In the United States, as elsewhere, even modest growth remains dependent on
strong fiscal and monetary stimulus. Large loan losses still need to be fully
recognized. The financial system, even if out of the emergency room, remains in
intensive care,” he said in the text of his prepared remarks.
Even under the best circumstances, deficits “far beyond past peacetime
experience” are in store for several years, he said.
No Near Term Alternative To US Dollar As World Currency
Volcker said that, although “the ultimate logic of a globalized financial
system is a world currency,” there will be no alternative to the US dollar “for
many tomorrows.”
“The theoretical premise that a system of floating exchange rates would
promote swift and efficient adjustment has not been borne out in practice,” he
said.
In the absence of a global currency, the dollar has provided a “workable,
pragmatic approach,” he said.
Maintaining the purchasing power of the U.S. dollar is “the central
responsibility of the United States,” Volcker said, adding that it is in the
country’s own interests to do so.
Volcker’s comments largely focused on the U.S.-China bilateral economic
relationship. “The two countries have been locked into widely divergent
patterns of consumption and savings for too long, with the result of persistent
and ultimately unsustainable imbalances in international payments.”
Such imbalances led to large capital flows into the U.S. from China, which
contributed to the formation of the housing bubble in the U.S., he said.
Volcker said that the U.S. government’s massive assistance to banks and other
financial institutions during the financial crisis has created “moral hazard,”
and that steps should be taken to limit the need for future bailouts, such as
clear policy limits to access to the “official safety net.”
-By Aaron Back, Victoria Ruan, and Jason Leow, Dow Jones Newswires
Dow Jones Newswires
June 11th, 2009 at 8:39 am06-11-09 0935ET
bop – u have cusip # on PVA bond? called bofa and didn’t get much help. thks
June 11th, 2009 at 8:42 amkyleandy — BofA was one of the LEAD underwriters… so, THEY SHOULD BE HELPFUL. Tell them that. Just that way… in ALL CAPS.
CUSIP 707882AB2
Issue price 97.003
Settles 6/15
June 11th, 2009 at 8:45 amDid anyone just catch Barnie Frank get pissed at March Haynes and quit the interview. Haynes told him “fine, we’ll manage without you”. Best thing on TV in a while.
June 11th, 2009 at 8:49 amz — NO! Wish i had seen that. Had to turn down Barney on CNBC yesterday… couldn’t stand to listen to Elmer Fudd taking bankers to task. His hands are just as dirty (even dirtier, actually) as anything he accuses others.
June 11th, 2009 at 8:52 amIt will no doubt be on youtube later today.
June 11th, 2009 at 8:55 ampost the link, if you see it… too funny!
June 11th, 2009 at 8:58 amKWK making it on up through that 12.09 level from Tater, thanks again for the read there T.
Stocks up with the market but again, pretty tepidly so, they don’t trust oil, the 30 year auction, pending BofA testimony, compensation stuff, or the gas number in 30 minutes.
June 11th, 2009 at 8:58 amBofA upgraded at Keefe, Bruyette… PT to $16 following completion of its capital raising actions that takes away a level of uncertainty.
Duh. Sloooooooooooooow move, guys.
June 11th, 2009 at 9:02 ambop – BofA just called back said not avail to gen public until 6/15, only to large investors now. don’t have much confidence in guy i talked to, does that sound right?
June 11th, 2009 at 9:03 amHmmmm…. i don’t believe him. As normal people buy treasury bonds before they settle… and IPOs before they settle… he is just giving you the run-around…
This is why buying individual bonds as an individual is so tough. However, it is worth it. So, call him back and tell him he is full of sh*t. “The bonds are SEC registered. Anyone can buy them at issue. That is what SEC registered MEANS, Dogface.”
You have to be a real pain when you buy bonds on the retail level. Tell him the SEC says it’s OK for you to buy at issue. He is giving you the typical “non-institutional bond investor” run around.
June 11th, 2009 at 9:10 amMy KWK $12.50s are going over the side as we speak, a little bit at a time apparently.
June 11th, 2009 at 9:11 amkyleandy — give me a sec… i’ll give you the list of underwriters… then you can tell him that XYZ is not giving you a problem… and you thought BofA was a class operation… or, something like that.
Sorry. But you really do have to be a pain about this stuff. Sadly.
June 11th, 2009 at 9:12 amkyleandy — tell him BofA is one of the LEAD underwriters… so you are shocked at the run-around he is giving you. You thought BofA was better than all the other Lead underwriters: Barclays, JPMo, Wachovia… and the Co-Mngrs: BNP Paribas, CapitalOneSouthcoast, PNC Capital, RBC Capital, and UBS.
June 11th, 2009 at 9:14 amZTRADE:
KWK – Sold the June $12.50 Calls for $0.45, up 73%. The stock has a had strong run and I will be selling the $10 strikes here shortly.
June 11th, 2009 at 9:18 amkyleandy — this is why you hear so much swearing on bond trading desks…. bond buying/selling is a negotiated deal. You have to come in with guns blazing. You have to sound like you know what you’re talking about. You have to be a real pr*ck, sometimes.
t’s like real estate… there is the “listed price” and the price at which the transaction truly takes place. You don’t see corporate bonds traded on exchanges… so it’s a negotiation dance you do. The ONE THING you always do, as a bond trader tho, is STICK TO YOUR WORD. “Your word is your bond,” in this business. It’s a “relationship business”…. remind him of that.
Bond trading lesson over.
June 11th, 2009 at 9:20 am(you should hear the Trading Desk at Pimco…. yowsers!!)
June 11th, 2009 at 9:22 amTater – looking for a near term TA read on PXD when you get a chance.
June 11th, 2009 at 9:23 amAdding to 29, I see the read from June 1 on your site at the bottom, just wondering if you had new thoughts.
June 11th, 2009 at 9:26 amCrude at $72.50. Most oily stocks still at levels when crude was at $65, for the most part, the names were higher 2 to 3 weeks ago.
June 11th, 2009 at 9:27 am20/1 watch: Current 19.3 $CL/$NG
June 11th, 2009 at 9:27 amBOP – are there many women on those trading desks?
June 11th, 2009 at 9:28 amZ – I wonder, from your graph, if distillate demand is bottoming out?
June 11th, 2009 at 9:28 amGas number in a minute. Reef – I could see traders using a consensus or better number and that ratio to drive a serious bump in gas. Almost looks like SWN is betting on that today. I might grab some RRC if that happens.
June 11th, 2009 at 9:29 am#27 – agreed on the four letter word vocabulary at bond desks. I used to have to call the bond desk all the time and used to be able to hear the chaos thru the phone – nuts.
June 11th, 2009 at 9:29 amDman – I think it is bottoming, just not growing much/at all. Need the export side to come back, that was big last year.
June 11th, 2009 at 9:29 amBTU’s on sale! NG BTU’s selling for 31% of oil BTU’s!
June 11th, 2009 at 9:30 amDo you think a Tsunami comes into this fire sale??
106 Bcf – pretty good number, gas jumping.
June 11th, 2009 at 9:30 amReef – It does not make a huge bit of sense, does it.
ZTRADE:
KWK – Sold the $10 June Calls for $2.40, up 113%.
June 11th, 2009 at 9:31 amDman — ha! No. More than there used to be, tho. So, bloomberg had to install a “profanity filter” on their bloomberg messaging system… to not offend tender ears.
Same reason you don’t see a lot of female hedge fund mngrs… it’s takes a certain swagger that can only be developed by thinking you can play above your level.
Just speaking facts.
June 11th, 2009 at 9:32 amz- it means short oil..or long ng?? I am a big help..LOL
June 11th, 2009 at 9:33 am41- Does this mean fund managers have to use the telephone?
June 11th, 2009 at 9:34 am#41 – i used to occasionally get a woman when i called the bond desk. While i was talking to her trying to buy something she half covered the phone and was screaming at somebody saying very bad things. She came back to me and was helpful and nice. She knew the drill.
June 11th, 2009 at 9:35 amreef — LOL!!
June 11th, 2009 at 9:35 am1520s — I was lucky enough to know one of the first women on the bond tading desk at Salomon Brothers. She went on to become the Treasurer of a Fortune 100 company. She had a swagger (and a vocabulary) that went toe-to-toe with the best/worst that bond trading desks offer. And her hands-on knowledge of the fixed income business saved her company a lot in interest expense. She was an amazing woman. So, NOT SAYING women can’t do it as well (or better) than men.
June 11th, 2009 at 9:39 amMorning all.
Z – agree about the Frank/Haynes interview (cut short!) – loved it! I thought Haynes was really gonna let him have it!
Just read P Flynns daily email – like you he is jumping up and down about the blame being put on speculators. That said these guys just talk their book when they want to. This push is due to speculation as yet again everyone jumps on the trade that is working (until it doesn’t!. Do I have anything against people making money out of trading? Of course not but he should call it for what it is. We are not short of oil and even if you believe in an economic recovery of which currently there is very little sign oil at these levels is gonna help kill it.
Okay thats my rant over. It drove me half insane a year ago that nobody would admit speculators ran the market to $150. It was only proved when it went back down to $32. Now we have them once again saying as they double it in 3 months that it is nothing to do with speculation.
Okay now my rant really is over!
Technicals for oil: we are in v up – its extended but it can keep extending. I think they run it at least to 75 before its done. Then we are going to come down very hard.
Indices: Finally we appear to have finished wave iv (although its not a definite) as we completed e of iv yesterday. This morning we have just completed the first of five waves to the upside and are currently correcting in wave ii. 950 on the SPX continues to act as a brick wall but next time we should get through it. Targets are 962, 989. Time wise we are getting close – likely about a week away.
June 11th, 2009 at 9:41 amBOP & 1520, thanks for the color 🙂
June 11th, 2009 at 9:42 amZTRADE: High risk, absolutely a WildZtrade meaning it either works for a double or is a $0.
(50) HK June $28’s for a dime. Stock has lagged the group, natural gas may put on a respectable move on the gas number and it will only take a move from here 25.15 to 26 today, tomorrow, or Monday for this to work, chart looks interesting and they have some pre 2Q news in the Eagle Ford (what they called their best well drilled there to date) that they could release. I own the lower $25 strikes here already but am looking for a little more leverage to a move.
June 11th, 2009 at 9:43 amTechTrader losing a bit of the pile he made yesterday going short. He is backing down the odds for a short trade working today. But is still short, with tight stops. Said the “gap up” dropped the odds of a short trade working today “a little.”
June 11th, 2009 at 9:44 amNicky, what do you think about the $ after the last week? Just a corrective bounce or more to come?
– not to put you on the spot or anything 🙂
June 11th, 2009 at 9:44 amBOP – #41
I recall some psych experiments where people were asked to rank their own ability at a task & were also tested for it. The men mostly self-assessed as above-average. The women mostly self-assessed as below average. But the actual performance didn’t look like that at all. I gather that’s what you’re alluding to..
June 11th, 2009 at 9:48 amI already predicted 5 dollar gasoline and the politicians blaming the evil oil companies
Their policies are doing everything possible to stop exploration and impact supply and then they wail when the prices go up.
amazing!
June 11th, 2009 at 9:48 amDman — #41. Exactly. Ask a female colleague if she can do some task at work that she has never done before — she will truthfully answer: “i’ll give it my best.” Ask a male colleague the same question and he will say: “of course!”
Men are taught (born?) to bluff. Women are taught (born?) to be practical. That was also based on a psycho-study i read a long time ago.
We had better cease this discussion, as I fear the gender police will make me forfeit my Miss America crown. 😉
June 11th, 2009 at 9:54 amBond desk = Pirates
By Steve Gelsi
Energy stocks continued riding higher with pricier oil on Thursday as the
International Energy Agency fattened its world-oil-demand forecast for the
first time in 10 months.
With U.S. gasoline prices averaging $2.63 a gallon, sales at U.S. retailers
rose for the first time in three months in May as expected, lifted by strong
car fuel and building material receipts, according to a government report on
Thursday.
The International Energy Agency increased its forecast of 2009 world oil
demand by 120,000 barrels a day, citing stronger-than-forecast first-quarter
data from countries belonging to the Organization for Economic Cooperation and
Development.
Global oil demand is projected at 83.3 million barrels a day, down 2.9%
compared with the year earlier. “These revisions do not necessarily imply
economic recovery but may reflect a slowing in previously sharp decline,” the
IEA said.
Against this backdrop, energy stocks moved up with rising crude oil and
advances in the broad market. The NYSE Arca Oil Index (XOI) rose 0.4% to 997.
The NYSE Arca Natural Gas Index (XNG) rose 0.9% to 458. The Philadelphia Oil
Service Index (OSX) rose 0.8% to 185. Component Schlumberger (SLB) rose 1% to
$59.85 after Societe Generale initiated coverage of the oil service giant with
a buy rating.
Oil prices moved up, with crude advancing 56 cents to $71.89 a barrel.
Among stocks in the spotlight, Exxon Mobil (XOM) is in talks with TransCanada
(TRP) to join a massive pipeline project in Alaska, The Houston Chronicle
reported Thursday. The viaduct to bring natural gas from the North Slope of
Alaska to U.S. markets would rival the Denali pipeline underway by
ConocoPhillips (COP) and BP (BP).
Shares of Exxon Mobil were up 0.1% to $73.94.
Scott Jepsen, spokesman for Denali, the joint venture of Houston-based
ConocoPhillips and London-based BP, told the newspaper that Denali officials
had no comment because they hadn’t seen an announcement about an alliance.
Linn Energy LLC late Wednesday named Mark E. Ellis as president and chief
executive officer, effective January 2010. He currently holds the position of
president and chief operating officer. Michael C. Linn, currently chairman and
chief executive officer, will become executive chairman of the board.
“I plan to remain very involved with the strategic direction of the company in
my role as executive chairman,” Linn said.
Shares of Linn Energy were down 0.5% cents to $19.99.
-Steve Gelsi
June 11th, 2009 at 9:54 amoops… make that #52. Watching mrkts at same time…
June 11th, 2009 at 9:55 amBOP – what time is the 30yr auction today?
June 11th, 2009 at 9:57 am1 pm
June 11th, 2009 at 9:58 amSign of the Times…. Bloomberg headline scrolling past — “Interior Department Says Bush Erred in Offering Utah Oil Leases”
Sounds like something Hugo would say.
June 11th, 2009 at 10:03 amWouldn’t be surprised to see some positive spin out of that Bond Auction – I am looking for a catalyst to push the markets up to fit the wave count!
Dman – I think the $ has a lower low out there but not by much. We completed 3 down last week to 78 area, then bounced back to 80.60 in wave iv and are now in v down which I think will take us to between 76.40 and 77.50.
Sterling has the same pattern in reverse of course and looks to be on its way to a higher high above last weeks 166.50 area. Targets is 1.68 area which would constitute a 50% correction of the fall. Next move from there should be sub 1.35.
June 11th, 2009 at 10:05 amThanks BOP
Does anyone see a broker comment on SWN?
Watch my PXD pretty closely now as I get ready to lighten up on June calls.
WRES – working higher
KOG – I’ll likely be in there within 2 weeks.
June 11th, 2009 at 10:07 amhttp://www.cnbc.com/id/15840232?video=1149068722&play=1
Frank on CNBC, they cut off haynes remark at the end though
i’m always suprised this doesn’t happen more often
June 11th, 2009 at 10:09 amThanks gaamblor. The closing comment from Haynes of “we can do without you” was priceless. Wife tells me that Frank quit an interview yesterday as well. If you can’t take the heat …
June 11th, 2009 at 10:13 amHK is acting like it’s next Thursday and there is pinning action.
June 11th, 2009 at 10:29 amZ – there seem to be some analyst movements on SU – do you know what they are? I just see a “ratings changes headline”
June 11th, 2009 at 10:31 amAn Advance Look At The 30-year Auction
Today brings the 3rd leg of the 3-day series of Treasury auctions collectively known as the refunding. After Tuesday’s auction of 3-year notes, and yesterday’s auction of 10-year notes, today will see 30-years auctioned at 1:00 EST.
Targets
June 11th, 2009 at 10:33 amo want to see yield come within 1-2 bps of When-Issued 30 yr yield, currently 4.66%
o want to see bid-to-cover ratio within a range of 2.02 – 2.40
o want to see Indirect Bidders around 33%, with range of 18 – 46%.
Dman – I don’t see anything from the crowd on SU.
Ram – my thought is that HK wakes up soon, it ran harder first, then got slowed by gas prices. Now the rest of the gassy names have been rising, bringing up their relative valuations. HK should then be able to move higher.
June 11th, 2009 at 10:41 amSWN_ UBS raised px tgt this morning to $58 from $48 Firm notes an increase in Fayetteville per well reserve assumptions. UBS also believes that the company will reduce per well costs in the play and adds that it currently ascribes no value to SWN’s Marcellus and James Lime undeveloped acreage positions. Rating is buy.
June 11th, 2009 at 10:47 amZTRADE:
PXD – Sold 100 (75%) of my June $30 calls for $0.90, up 44%, with the stock at $29.75. The position had grown too large for the $10KP to be appropriate. I will probably punt the remaining Junes later today. I continue to hold the July $30 calls here.
June 11th, 2009 at 10:57 amThanks nifkin
June 11th, 2009 at 10:58 amFeeling like holding more cash as we approach expiry given the run we have had. This runs a bit counter to my sense that “they” will try to lift the market as we approach quarter end. I’m happy to play with smaller positions for now and will be looking at some of my favorite names that have not played as well as the rest.
June 11th, 2009 at 11:02 amFound my trading rules file, will likely publish that tomorrow.
June 11th, 2009 at 11:05 amCrude hitting $72.75. The higher it goes, the more I like cash. I think mid $60s is in the cards before $80 and I don’t think we are in a position on global inventories or rate of change of consumption that warrants a move to $80. Just thinking out loud on a quiet summer day.
June 11th, 2009 at 11:06 amJoe – smiley idiot – Terranova – was screaming to buy it last night on Fast Money Z. Until we violate the upchannel according to him. Well that upchannel is now near vertical so he doesn’t have much room for maneouvre. But no doubt he will be out long before he tells everyone else to get out.
June 11th, 2009 at 11:18 amNG up 18 cents now at 3.89, these large oscillations are part of the bottoming process. Nicky, I really don’t think I’ll be eating any two dollar hats.
June 11th, 2009 at 11:19 amZ – its going to be interesting to see what happens when they exit the oil trade. I feel sure there is a switch to nat gas coming but they may take it lower first.
June 11th, 2009 at 11:23 amStepping out for a cuppa joe, back before the auction. Can’t believe I care about the auction.
June 11th, 2009 at 11:30 amthe fastest way to determine if an auction is a “success” or not, is to compare the When Issued 30-yr yield to the actual auction results. I’ll post the WI yield just b/f 1 pm. Yesterday, the 10 yr yield came in 5 bps higher than the WI 10 yr yield, just for a reference point.
June 11th, 2009 at 11:48 amThanks BOP, much appreciated. And I thought the fastest way was to watch the SP tick chart, lol.
PXD at $30. I don’t mind leaving a little on the table, still have upside in the remaining calls.
KWK – left more there, chart really popped, will not chase but will buy back into a 2 to 3 day pullback.
June 11th, 2009 at 11:54 amTrading rules… looking forward to that!
HK working.
June 11th, 2009 at 11:54 amHK really starting to wake up now.
June 11th, 2009 at 11:55 amz — that too. But, always nice to have back-up.
June 11th, 2009 at 11:57 amlooks like the 30yr WI bond is 4.73% bid / 4.72 offered. it has rallied about 3 bps ahead of the results. hope we’re not disappointed.
June 11th, 2009 at 11:58 am30 yr auction yield = 4.72
June 11th, 2009 at 12:01 pmwow. indirect at 49% and bid/cover at 2.68.
would have to call that a success.
June 11th, 2009 at 12:02 pmNG back up through $4, up 33 cents as crude takes on $73.
Very tempted to take a little KOG while it just sits here.
June 11th, 2009 at 12:03 pmKOG — someone just moved my antelope…
June 11th, 2009 at 12:06 pmFrom the oily angle, APA somewhat underperforming today but the stock is in plain and simple breakout mode.
EOG looks ready to launch, continuing to hold $75 and $80 June calls there.
After running the numbers in the post, I decided CLR needed a breather despite its unhedged nature but it continues to be a go to name for the Street when oil rallies. That looks very mo-mo to me and I will not chase for now.
WRES at $2.70 looks like a diamond in the rough to me, no on cash flow but on $/Mcfe and the fact that a higher oil price means barrels come back onto the reserve statement pretty quickly.
WLL – interesting but I’ve been away awhile, not as up to speed as I like being.
Should have had little BEXP in the weird little names part of this morning’s list. Not a big fan but this oil price rally really helps them from a cash crunch and borrowing line crunch status.
June 11th, 2009 at 12:16 pmSize bid out there for $0.15 on those HK $28s. 50% in a couple of hours not too bad, will wait for either the open tomorrow or Monday to punt unless it really jumps today.
June 11th, 2009 at 12:18 pmHK — back to a 26-handle. Now, if Floyd can just show some restraint on issuing more stock up here… we should be able to move higher.
June 11th, 2009 at 12:19 pmhk just acelerated termination of shareholder rights plan to yesterday what are the implicaitons of this?
June 11th, 2009 at 12:24 pmBOP, I thought that was your bear in the doghouse? Most e&p cos I follow have low volume on today’s up move. Added some more KOG, good luck on trying to get a fill on the bid.
June 11th, 2009 at 12:24 pmwest — KOG frustration is setting in… weed waiting no fun.
June 11th, 2009 at 12:27 pmGT – did not see the filing. Generally those are meant to ward off takeovers so killing it off early is interesting. I can’t imagine they would want to sell anywhere within 50% of here. I don’t see an 8K filed, where did you see that?
June 11th, 2009 at 12:28 pmWest – I hear ya on the low volume, seeing much the same, starting to pick mid day which has been the pattern of many recent days. Like Art Cashin says, people not wanting to miss the trade put in low ball bids at the open and by the close they are taking the ask while holding their nose.
June 11th, 2009 at 12:30 pmIt came across fidelity atp.
June 11th, 2009 at 12:30 pmCrude $73. I guess the speculators are planning to rack up the dough before they get outlawed.
June 11th, 2009 at 12:30 pmPetrohawk Energy Announces Termination of Stockholder Rights
2009-06-11 17:20:33.383 GMT
Petrohawk Energy Announces Termination of Stockholder Rights Plan
PR Newswire
HOUSTON, June 11
HOUSTON, June 11 /PRNewswire-FirstCall/ — Petrohawk Energy Corporation
(“Petrohawk” or the “Company”) (NYSE: HK) today announced the termination
of the Company’s Stockholder Rights Plan (the “Plan”). The Company entered
into an amendment to its Plan, which accelerated the final expiration date
of the Plan from October 14, 2009 to the close of business on June 10,
2009, effectively terminating the Plan as of 5:00 p.m.Houston, Texas time
yesterday. Stockholders do not have to take any action as a result of this
termination.
As a result of the termination of the Plan, the rights under the Plan will
be de-registered under the Securities Act of 1934, as amended, and
delisted from the New York Stock Exchange, and will not be listed or
quoted on any other exchange. This action will have no effect on
Petrohawk’s common stock, which is listed on the New York Stock Exchange
and registered under the Securities Act of 1934, as amended.
Petrohawk Energy Corporation is an independent energy company engaged in
June 11th, 2009 at 12:30 pmthe acquisition, production, exploration and development of natural gas and oil with properties concentrated in North Louisiana, Arkansas, South
Texas, East Texas, Oklahoma and the Permian Basin.
GT – thanks, I got it now. Odd, what I see does not mention replacing it with a new plan.
June 11th, 2009 at 12:32 pmRE HK – wow, they killed it as of today. Walks, talks, makes people think they have a deal they like. I am not one to spread rumors but just looking at that would be my first thought as the statement was short and sweet. It’s obviously making others think that too.
I have a little difficulty believing someone will want to pay up for their reserves right now as we have not seen a deal in the price range HK’s proved are trading in a long, long time. If you take a look at their Haynesville/Fayetteville/Eagle Ford shale potential it becomes easier to see how it might happen. Would need to be someone big, who is not concerned about the frac water issue or the government’s somewhat aggressive stance towards drilling.
June 11th, 2009 at 12:37 pmZ – “wow, they killed it as of today”
translation?
June 11th, 2009 at 12:38 pmBOP or anyone, do you recall companies terminating their pills early to do a secondary? I do not see the logic in that. However, Floyd may be planning to release news on the latest two Eagle Ford Shale wells at which time I’ll likely sell out as he will probably do a deal to fund further leasehold and drilling.
June 11th, 2009 at 12:40 pmDma – they terminated that plan, actually as of yesterday’s close.
June 11th, 2009 at 12:40 pmZ – sorry but I’m not conversant in these plans, so if you could just dumb down the implications (imagine you are talking to a CNBC host)…
June 11th, 2009 at 12:44 pmz — HK — i don’t recall many companies terminating their plans early. frankly, none that i can think of. why do it just to ease a 2ndary? unless they got a reverse inquiry from one or more of their large holders.
why do this? why do this indeed… ??
June 11th, 2009 at 12:44 pmz- their annual meeting is 6/18/09 – there was an item on the proxy to vote to increase shares outstanding from 300m to 500m. It is proposal #2 on the proxy form. They have about 275m out right now i think.
June 11th, 2009 at 12:45 pmYou would have thought the WHO upping swine flu to a pandemic would be enough to bring oil to a stop.
June 11th, 2009 at 12:45 pmWell, the $28 HK strikes became popular. I was not kidding when I said risky with 6.5 days until expiry and 10% out of the money. This market feels a bit ahead of itself. I’m holding but I’m also watching it pretty closely.
June 11th, 2009 at 12:45 pm1520 – thanks, good point, that’s different, funny the lack of explanation in the pr. Trick, tricky, tricky on their part.
Shareholder rights plans:
http://en.wikipedia.org/wiki/Poison_pill
I just filled a little more July …
June 11th, 2009 at 12:53 pmToo bad Goldman didn’t get caught up in this. This is for you, BOP!
Wall Street Journal 06/11/09
By GREGORY ZUCKERMAN, SERENA NG and LIZ RAPPAPORT
A canny trade by a small brokerage firm in two markets at the heart of the financial crisis has left some of the biggest players on Wall Street crying foul.
The trade, by Amherst Holdings of Austin, Texas, was particularly galling to the big banks because it turned what they believed was a sure-fire profit into a loss.
The burned banks include J.P. Morgan Chase & Co., Royal Bank of Scotland Group PLC and Bank of America Corp. Some banks have reached out to two industry trade groups about Amherst’s actions, and the groups are reviewing the transaction, according to people familiar with their thinking. “It’s all-out warfare” between the banks and Amherst, said a senior banker at one firm that lost money.
At issue is a move by Amherst to boost the price of bonds to avoid paying out on credit-default swaps it had sold. Banks are questioning whether Amherst set them up by selling credit-default swaps and then rendering them worthless.
Amherst says it didn’t do anything improper, but took advantage of an opportunity when it emerged. A lawyer reviewed and blessed the strategy for the firm, according to people familiar with the matter.
Privately held Amherst says it acted in good faith trying to limit losses for clients, who had sold credit-default swaps on the securities. “We wouldn’t jeopardize our business and reputation by entering into an opportunistic trade knowing what the outcome would be,” said Amherst’s chief executive, Sean Dobson.
The dispute echoes battles over the largely unregulated credit-default-swap market during last year’s financial turmoil. Companies including Morgan Stanley accused investors of using the insurance-like contracts to hurt the value of their shares, creating a panic among other investors and the firms’ clients.
In 2007, a group of hedge funds led by Paulson & Co. suspected Bear Stearns of plotting to boost the value of subprime-mortgage securities. At the time, Bear (which was later bought by J.P. Morgan) denied planning to engage in such transactions.
So far the latest dust-up has been all words, in part, bankers say, because they are wary of attracting more regulatory scrutiny at a time when lawmakers are planning major reforms in the largely unregulated derivatives markets, long lucrative for banks. While the banks’ combined losses from the trade were in the tens of millions of dollars — modest by recent standards — they are the buzz of Wall Street as firms try to prevent a repeat of the episode.
The trade involved credit-default swaps and securities backed by subprime mortgages. The original securities had been sold by Lehman Brothers and were backed by $335 million of subprime mortgages mostly on homes in California made at the housing bubble’s peak in 2005, according to the prospectus.
Following a wave of refinancing and defaults, only $29 million of the loans were left outstanding by March 2009, half of which were delinquent or in default, according to a performance report by Moody’s Investors Service.
Believing the securities would become worthless, traders at J.P. Morgan bought credit-default swaps over the past year from Amherst, according to people familiar with the matter. Credit-default swaps act like insurance, paying off the buyer if securities are hit by losses. Other banks including RBS Securities, which is the U.S. investment-banking arm of Royal Bank of Scotland, and BofA also bought swaps on the securities from different trading partners.
The banks had to pay up for the protection, similar to a person buying insurance on a beach house just before a hurricane. They paid as much as 80 to 90 cents for every dollar of insurance, the going rate last fall according to dealer quotes, expecting to receive a dollar back when the securities became worthless over the coming months.
Traders can buy credit-default swaps on securities they don’t own. At one point, at least $130 million of bets had been made on the performance of around $27 million in securities, according to a person familiar with the matter.
In late April, traders at some banks were shocked to find out from monthly remittance reports that the bonds they had bet against had been paid off in full. Normally an investor can’t pay off loans like that but if the amount of outstanding loans falls to less than 10% of the original pool, the servicer — or company that collects mortgage payments from homeowners and forwards them to investors who own the securities — can buy them and make bondholders whole.
That’s what happened in this case. In April, a servicer called Aurora Loan Services at the behest of Amherst purchased the remaining loans and paid off the bonds.
Although Amherst won’t provide specifics and won’t comment on its arrangement with Aurora, it doesn’t deny that it took this approach. (Aurora says it is a subsidiary of Lehman Brothers Bank, but not part of the Lehman Brothers Holdings bankruptcy filing.)
A spokeswoman for Aurora says these servicer provisions are customary and when rights are exercised it ensures that appropriate requirements are met.
When the bonds got paid off, the swaps became worthless, meaning the banks effectively forfeited what they had paid for the insurance. J.P. Morgan lost millions, while RBS and BofA suffered minimal losses, said people familiar with the matter.
On April 28 representatives of banks including J.P. Morgan, Goldman Sachs Group Inc. and UBS AG’s UBS Securities held a conference call to discuss the trade but didn’t come to any conclusion, according to people familiar with the matter.
Amherst is the antithesis of the big Wall Street banks. With its Austin headquarters and around 100 employees, the 15-year-old firm has long been a player in the mortgage market, but is now one of the upstarts trying to take business from banks weakened by the credit crisis. The firms has hired bankers, mortgage traders and research analysts who had left banks such as Bear Stearns and UBS, while raising new capital to expand its trading activities.
Since the mortgage securities were valued at just $3 million or so in the market, well below the $27 million they were redeemed for, traders believe Amherst entered into an uneconomic transaction to profit from its swap positions.
Firms that suffered losses as well as some that didn’t have brought the trade to the attention of two financial industry groups, the Securities Industry and Financial Markets Association, and the American Securitization Forum, which are considering their concerns, say people familiar with the trade groups’ thinking.
Critics of these markets say such conflicts aren’t a surprise. In secretive, over-the-counter markets “there are hidden risks and fault lines that don’t show up until times of stress or when people are losing money,” says Martin Weiss of Weiss Research, an investment consultancy in Jupiter, Fla., not involved in the trade.
Many credit-default swap contracts that were written on subprime mortgage securities over the past three years remain outstanding, and holders could lose out if more bonds are made whole. Deutsche Bank has sent a list, reviewed by The Wall Street Journal, to its clients of more than two dozen other mortgage pools that could see similar moves.
http://online.wsj.com/article/SB124468148614104619.html
June 11th, 2009 at 12:53 pmZTRADE:
Added (15) July $29 calls for $0.65 with the stock at $26. The stock seems to be playing catch up to the group following the termination of their shareholder rights plan. It appears that this is routine, not takeover related decision, and in fact, is being done to allow them to increase the number of shares outstanding at their upcoming shareholders meeting. I expect them to have further news out of their Eagle Ford and Haynesville Shale developments soonish.
June 11th, 2009 at 12:56 pmSam — read that this morning. only WISH i had been the one to pull that off. way too FUNNY!! (always satisfying to pull something over a NY i-bank trading desk… doesn’t happen nearly enough)
June 11th, 2009 at 12:58 pmz — the HK announcement is just plain weird. Floyd, his CFO, and at least one board member sold shares around the beginning of this month. Heard it was b/c he is bearish on nat gas prices. Also, most people expect him to do a 2ndary sometime soon. But, would think he would wait until after the shareholder vote to increase authorized shares.
It’s the “effective immediately” part that I don’t get. What changed? And changed so quickly that you can’t wait until October??
June 11th, 2009 at 1:03 pmZ, out of all the E&P names, why has SWN been the only one I can find to get back close to last summer’s highs?
June 11th, 2009 at 1:03 pmSo HK will release some news & drop a secondary? Are you thinking the news will be good enough not to worry about the secondary for the July calls?
June 11th, 2009 at 1:03 pmWow, if BOP doesn’t get the HK shenanigans, I don’t feel so bad about being clueless.
Market likes it though, whatever it is 🙂
June 11th, 2009 at 1:07 pmDman – these guys have a history of putting out operations updates before the quarter. They also have a history of dropping secondaries (like that phrase) on us following good news. Often they and others will drop the good news in the morning, let the stock run all day and announce the secondary after the close or a day or two later. The good news blunts the impact of the dilution and says “this is the great shiny bobble I present to you…oh, and by the way, its going to cost you, but look how shiny it is”
June 11th, 2009 at 1:07 pmAAA – massive unit volume growth, falling F&D costs, falling LOE. They are a bit unique and are priced as such, pretty lofty multiple of CFPS. Also, they are not as leveraged as others so while someone like PXD basically shut down their drilling program as they attempt stay within cash flow, these guys were able to keep drilling and therefore completing wells as costs came down.
June 11th, 2009 at 1:10 pmDman — nope. Don’t get the HK announcement at all. Guess we shall see, however.
Scuttlebutt has it that Floyd’s last coupla stock sales were to fund his 3rd divorce. Oilmen, they ain’t dull!
June 11th, 2009 at 1:12 pmZ – 117 thanks Z. I remember all too well their history of dropping secondaries on us, but I’d forgotten the “news in the AM, secondary in the PM” aspect.
June 11th, 2009 at 1:13 pmDman – yep, I know it’s not Friday but this would be Floyd’s movie quote for you, to get you warmed up to buy his secondary
“look what I have CREATED! I have CREATED FIRE!”
June 11th, 2009 at 1:16 pmIndices confirmed the breakout. 948 must hold on the SPX. We can complete the rally anywhere up here so you need to be on full alert! Possible SPX targets are 959, 962, 965 and 968
June 11th, 2009 at 1:18 pmToday seems quite crazed.
June 11th, 2009 at 1:24 pmNicky – thanks very much for the levels, was just about to ask for them.
June 11th, 2009 at 1:25 pmNow Doug Kass on twitter:
DougKassThe quality of the rally is diminishing as it narrows. The quality of the rally is diminishing as breadth narrows. Raise hedges. $$
June 11th, 2009 at 1:25 pmIt doesn’t look like we need to worry too much about the rally – oil will hold us up and I don’t think the market tops until oil does.
June 11th, 2009 at 1:27 pmScratch the comment about 945 needing to hold. Its possible we have only completed i of v and are now in the wave ii pullback. If that is the case we can come all the way back to 938 on spx.
June 11th, 2009 at 1:32 pmZ do you when we will know the outcome of the Iranian elections?
June 11th, 2009 at 1:45 pmIran results expected Saturday.
June 11th, 2009 at 1:49 pmty. do you think the outcome effects oil?
June 11th, 2009 at 1:51 pmLast I saw it was too close to call. Turnout is expected to be high which might be bad for Ahmad. I’d bet oil drops a buck or two for a short period if he is ousted. Kind of doubt he will be but that’s just me being cynical and knowing who he his backed by.
June 11th, 2009 at 1:52 pmVLO on the tape shutting its Aruba 235,000 bopd refinery for 2 to 3 months due to weak margins.
June 11th, 2009 at 1:56 pmBOP – any revised thoughts from TT?
June 11th, 2009 at 2:01 pmI think he’s shopping for a less expensive car.
June 11th, 2009 at 2:02 pmTT — “thank god for stops”
June 11th, 2009 at 2:04 pmrandom thoughts worth repeating…. steep yield curves and tightening credit spreads make for happy banks.
June 11th, 2009 at 2:08 pmAs long as he is still shopping he’s part of the problem for shorts, lol.
June 11th, 2009 at 2:09 pmOK… got some plausible answers to the HK poison pill pull. here goes:
1) Shareholder proxy group was going to recommend that s/hs vote against increasing the share count, as long as the poison pill was there. [Makes sense.]
2) Fido owns 14% of HK and wants to take that higher. Fido is single-mindedly pursuing the inflation/hard asset trade. Seems they view HK as a juicy addition to that fruit basket. [Makes even more sense]
June 11th, 2009 at 2:22 pmFair warning, I can vacate those June calls bought earlier at any time. Right now I’m thinking to hold them but they are up 100% on the bid so they are fair game.
June 11th, 2009 at 2:22 pm138 – thanks for following up on that BOP. Fido makes a lot of sense.
June 11th, 2009 at 2:23 pmFido=Fidelity?
June 11th, 2009 at 2:30 pmI have not read anything today and am not current yet. Had a moment to peek at charts and saw KWK was moving. Resistance from the Oct 3 – Oct 6 gap is between 13.51 and 14.07 (for a full close of the gap at 14.07). Fib retracement of note was around 13.31, so that could act as resistance as well.
June 11th, 2009 at 2:36 pmram – yes, you are correct. Fido is short-hand for Fidelity.
June 11th, 2009 at 2:38 pmFido = fidelity
Tater – thanks, punted mine a little while ago, just feeling like I needed raise a little cash, left a little on the table but its a problem to have.
Can you take a look at PXD hitting $30+, I took a chunk off the table earlier but am still long quite a bit for the $10KP.
June 11th, 2009 at 2:39 pmNice trades with KWK!
PXD – That one is very tough. That $30 point is just sitting there and is a serious breakout point. Above that I can see resistance at 32.85ish but very muddled area. It could really jump north or just fade at $30. Short term view doesn’t hold the clue, figure it’s a job for you fundamentalist traders.
June 11th, 2009 at 2:50 pmSorry, no help.
Weak looking close here.
June 11th, 2009 at 2:56 pmThanks T, that does help, nervous looking profit taking into the close.
June 11th, 2009 at 2:58 pmNicky – glad you added that lower level on the SP. Man did they crush back the days gains in the last 15 minutes.
June 11th, 2009 at 3:00 pmFidelity has almost 5 times the size of the next largest shareholder. (HK)
June 11th, 2009 at 3:00 pmFido luvs Floyd
June 11th, 2009 at 3:01 pmFair warning — I will be traveling tomorrow and monday, back Tues. Checking in on both days, but will be inconsistant. Will try to post trading desk comments in the morning. But, can’t promise.
That said, TechTrader’s 80/20 short call this morning SUCKED. But, he was getting impossible to work with lately, with all that success going to his head.
IG 127 1/2
HY 84 7/8
We can live with those levels for a while. lots and lots of corporate issuance this week… and usually, companies hold back on days when the 800-lb Gorilla (the US Govt) is issuing debt. Not so this week. Very bullish for corporate bonds. Lots of appetite out there.
June 11th, 2009 at 3:07 pmWe’ll miss ya BOP, beerthirty.
June 11th, 2009 at 3:23 pmBOP r u going to rearrange your antelope at kog on your travels?
June 11th, 2009 at 4:01 pmHK – shareholder rights plan – that is very unusual; have not seen that b4. How can you not think a deal is in the work ? Someone should call mgmt and ask if they can articulate a reason for taking that action.
I guess one could claim that mgmt believes having a plan is a drag on the stock ….
June 11th, 2009 at 5:00 pm110 — that is hilarious !
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January 6th, 2015 at 2:40 pm