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
  • 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
    • 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.  


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,"


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:

  1. Holdings Watch
  2. Commodity Watch
  3. Natural Gas Preview
  4. EIA Oil Inventory Review
  5. Stuff We Care About Today - deal watch
  6. 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
  • 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


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


157 Responses to “Thursday – Natural Gas Preview and Oil Inventory Review”

  1. 1
    Sambone Says:

    By Nick Heath

    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
    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
    “(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
    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
    06-11-09 0817ET

  2. 2
    Sambone Says:

    By Peter Brimelow

    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
    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
    (OI does suggest that FMC Technologies Inc. (FTI) will manufacture much of the
    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
    06-11-09 0819ET

  3. 3
    BirdsofpreyRcool Says:

    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

  4. 4
    BirdsofpreyRcool Says:

    TechTrader 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

  5. 5
    zman Says:

    All 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.

  6. 6
    zman Says:

    re 4 = LOL, its a traders market for sure.

  7. 7
    bill Says:

    Z 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.

  8. 8
    BirdsofpreyRcool Says:

    File 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.

  9. 9
    zman Says:

    Bill – 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.

  10. 10
    Sambone Says:

    By Christine Buurma

    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
    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
    Dow Jones Newswires
    06-11-09 0935ET

  11. 11
    1520sbroad Says:

    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.

  12. 12
    Sambone Says:

    BEIJING (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
    “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
    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
    06-11-09 0935ET

  13. 13
    kyleandy Says:

    bop – u have cusip # on PVA bond? called bofa and didn’t get much help. thks

  14. 14
    BirdsofpreyRcool Says:

    kyleandy — 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

  15. 15
    zman Says:

    Did 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.

  16. 16
    BirdsofpreyRcool Says:

    z — 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.

  17. 17
    zman Says:

    It will no doubt be on youtube later today.

  18. 18
    BirdsofpreyRcool Says:

    post the link, if you see it… too funny!

  19. 19
    zman Says:

    KWK 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.

  20. 20
    BirdsofpreyRcool Says:

    BofA 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.

  21. 21
    kyleandy Says:

    bop – 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?

  22. 22
    BirdsofpreyRcool Says:

    Hmmmm…. 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.

  23. 23
    zman Says:

    My KWK $12.50s are going over the side as we speak, a little bit at a time apparently.

  24. 24
    BirdsofpreyRcool Says:

    kyleandy — 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.

  25. 25
    BirdsofpreyRcool Says:

    kyleandy — 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.

  26. 26
    zman Says:


    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.

  27. 27
    BirdsofpreyRcool Says:

    kyleandy — 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.

  28. 28
    BirdsofpreyRcool Says:

    (you should hear the Trading Desk at Pimco…. yowsers!!)

  29. 29
    zman Says:

    Tater – looking for a near term TA read on PXD when you get a chance.

  30. 30
    zman Says:

    Adding to 29, I see the read from June 1 on your site at the bottom, just wondering if you had new thoughts.

  31. 31
    zman Says:

    Crude 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.

  32. 32
    reefguy Says:

    20/1 watch: Current 19.3 $CL/$NG

  33. 33
    Dman Says:

    BOP – are there many women on those trading desks?

  34. 34
    Dman Says:

    Z – I wonder, from your graph, if distillate demand is bottoming out?

  35. 35
    zman Says:

    Gas 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.

  36. 36
    1520sbroad Says:

    #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.

  37. 37
    zman Says:

    Dman – I think it is bottoming, just not growing much/at all. Need the export side to come back, that was big last year.

  38. 38
    reefguy Says:

    BTU’s on sale! NG BTU’s selling for 31% of oil BTU’s!
    Do you think a Tsunami comes into this fire sale??

  39. 39
    zman Says:

    106 Bcf – pretty good number, gas jumping.

  40. 40
    zman Says:

    Reef – It does not make a huge bit of sense, does it.


    KWK – Sold the $10 June Calls for $2.40, up 113%.

  41. 41
    BirdsofpreyRcool Says:

    Dman — 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.

  42. 42
    reefguy Says:

    z- it means short oil..or long ng?? I am a big help..LOL

  43. 43
    reefguy Says:

    41- Does this mean fund managers have to use the telephone?

  44. 44
    1520sbroad Says:

    #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.

  45. 45
    BirdsofpreyRcool Says:

    reef — LOL!!

  46. 46
    BirdsofpreyRcool Says:

    1520s — 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.

  47. 47
    Nicky Says:

    Morning 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.

  48. 48
    Dman Says:

    BOP & 1520, thanks for the color 🙂

  49. 49
    zman Says:

    ZTRADE: 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.

  50. 50
    BirdsofpreyRcool Says:

    TechTrader 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.”

  51. 51
    Dman Says:

    Nicky, 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 🙂

  52. 52
    Dman Says:

    BOP – #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..

  53. 53
    bill Says:

    I 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.


  54. 54
    BirdsofpreyRcool Says:

    Dman — #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. 😉

  55. 55
    Sambone Says:

    Bond 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
    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
    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

  56. 56
    BirdsofpreyRcool Says:

    oops… make that #52. Watching mrkts at same time…

  57. 57
    zman Says:

    BOP – what time is the 30yr auction today?

  58. 58
    BirdsofpreyRcool Says:

    1 pm

  59. 59
    BirdsofpreyRcool Says:

    Sign of the Times…. Bloomberg headline scrolling past — “Interior Department Says Bush Erred in Offering Utah Oil Leases”

    Sounds like something Hugo would say.

  60. 60
    Nicky Says:

    Wouldn’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.

  61. 61
    zman Says:

    Thanks 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.

  62. 62
    gaamblor Says:


    Frank on CNBC, they cut off haynes remark at the end though

    i’m always suprised this doesn’t happen more often

  63. 63
    zman Says:

    Thanks 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 …

  64. 64
    ram Says:

    HK is acting like it’s next Thursday and there is pinning action.

  65. 65
    Dman Says:

    Z – there seem to be some analyst movements on SU – do you know what they are? I just see a “ratings changes headline”

  66. 66
    BirdsofpreyRcool Says:

    An 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.

    o 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%.

  67. 67
    zman Says:

    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.

  68. 68
    nifkin Says:

    SWN_ 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.

  69. 69
    zman Says:


    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.

  70. 70
    zman Says:

    Thanks nifkin

  71. 71
    zman Says:

    Feeling 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.

  72. 72
    zman Says:

    Found my trading rules file, will likely publish that tomorrow.

  73. 73
    zman Says:

    Crude 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.

  74. 74
    Nicky Says:

    Joe – 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.

  75. 75
    zman Says:

    NG 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.

  76. 76
    Nicky Says:

    Z – 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.

  77. 77
    zman Says:

    Stepping out for a cuppa joe, back before the auction. Can’t believe I care about the auction.

  78. 78
    BirdsofpreyRcool Says:

    the 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.

  79. 79
    zman Says:

    Thanks 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.

  80. 80
    Dman Says:

    Trading rules… looking forward to that!

    HK working.

  81. 81
    zman Says:

    HK really starting to wake up now.

  82. 82
    BirdsofpreyRcool Says:

    z — that too. But, always nice to have back-up.

  83. 83
    BirdsofpreyRcool Says:

    looks 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.

  84. 84
    BirdsofpreyRcool Says:

    30 yr auction yield = 4.72

  85. 85
    BirdsofpreyRcool Says:

    wow. indirect at 49% and bid/cover at 2.68.

    would have to call that a success.

  86. 86
    zman Says:

    NG back up through $4, up 33 cents as crude takes on $73.

    Very tempted to take a little KOG while it just sits here.

  87. 87
    BirdsofpreyRcool Says:

    KOG — someone just moved my antelope…

  88. 88
    zman Says:

    From 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.

  89. 89
    zman Says:

    Size 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.

  90. 90
    BirdsofpreyRcool Says:

    HK — 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.

  91. 91
    Gtinvest Says:

    hk just acelerated termination of shareholder rights plan to yesterday what are the implicaitons of this?

  92. 92
    West Says:

    BOP, 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.

  93. 93
    BirdsofpreyRcool Says:

    west — KOG frustration is setting in… weed waiting no fun.

  94. 94
    zman Says:

    GT – 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?

  95. 95
    zman Says:

    West – 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.

  96. 96
    Gtinvest Says:

    It came across fidelity atp.

  97. 97
    zman Says:

    Crude $73. I guess the speculators are planning to rack up the dough before they get outlawed.

  98. 98
    BirdsofpreyRcool Says:

    Petrohawk 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

    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
    the 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.

  99. 99
    zman Says:

    GT – thanks, I got it now. Odd, what I see does not mention replacing it with a new plan.

  100. 100
    zman Says:

    RE 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.

  101. 101
    Dman Says:

    Z – “wow, they killed it as of today”


  102. 102
    zman Says:

    BOP 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.

  103. 103
    zman Says:

    Dma – they terminated that plan, actually as of yesterday’s close.

  104. 104
    Dman Says:

    Z – 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)…

  105. 105
    BirdsofpreyRcool Says:

    z — 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… ??

  106. 106
    1520sbroad Says:

    z- 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.

  107. 107
    Nicky Says:

    You would have thought the WHO upping swine flu to a pandemic would be enough to bring oil to a stop.

  108. 108
    zman Says:

    Well, 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.

  109. 109
    zman Says:

    1520 – thanks, good point, that’s different, funny the lack of explanation in the pr. Trick, tricky, tricky on their part.

    Shareholder rights plans:

    I just filled a little more July …

  110. 110
    Sambone Says:

    Too bad Goldman didn’t get caught up in this. This is for you, BOP!

    Wall Street Journal 06/11/09

    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.


  111. 111
    zman Says:


    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.

  112. 112
    BirdsofpreyRcool Says:

    Sam — 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)

  113. 113
    BirdsofpreyRcool Says:

    z — 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??

  114. 114
    AAA Says:

    Z, 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?

  115. 115
    Dman Says:

    So 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?

  116. 116
    Dman Says:

    Wow, if BOP doesn’t get the HK shenanigans, I don’t feel so bad about being clueless.

    Market likes it though, whatever it is 🙂

  117. 117
    zman Says:

    Dman – 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”

  118. 118
    zman Says:

    AAA – 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.

  119. 119
    BirdsofpreyRcool Says:

    Dman — 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!

  120. 120
    Dman Says:

    Z – 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.

  121. 121
    zman Says:

    Dman – 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!”

  122. 122
    Nicky Says:

    Indices 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

  123. 123
    VTZ Says:

    Today seems quite crazed.

  124. 124
    zman Says:

    Nicky – thanks very much for the levels, was just about to ask for them.

  125. 125
    Nicky Says:

    Now 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. $$

  126. 126
    Nicky Says:

    It 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.

  127. 127
    Nicky Says:

    Scratch 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.

  128. 128
    Nicky Says:

    Z do you when we will know the outcome of the Iranian elections?

  129. 129
    zman Says:

    Iran results expected Saturday.

  130. 130
    Nicky Says:

    ty. do you think the outcome effects oil?

  131. 131
    zman Says:

    Last 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.

  132. 132
    zman Says:

    VLO on the tape shutting its Aruba 235,000 bopd refinery for 2 to 3 months due to weak margins.

  133. 133
    zman Says:

    BOP – any revised thoughts from TT?

  134. 134
    BirdsofpreyRcool Says:

    I think he’s shopping for a less expensive car.

  135. 135
    BirdsofpreyRcool Says:

    TT — “thank god for stops”

  136. 136
    BirdsofpreyRcool Says:

    random thoughts worth repeating…. steep yield curves and tightening credit spreads make for happy banks.

  137. 137
    zman Says:

    As long as he is still shopping he’s part of the problem for shorts, lol.

  138. 138
    BirdsofpreyRcool Says:

    OK… 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]

  139. 139
    zman Says:

    Fair 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.

  140. 140
    zman Says:

    138 – thanks for following up on that BOP. Fido makes a lot of sense.

  141. 141
    ram Says:


  142. 142
    tater Says:

    I 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.

  143. 143
    BirdsofpreyRcool Says:

    ram – yes, you are correct. Fido is short-hand for Fidelity.

  144. 144
    zman Says:

    Fido = 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.

  145. 145
    tater Says:

    Nice 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.
    Sorry, no help.

  146. 146
    zman Says:

    Weak looking close here.

  147. 147
    zman Says:

    Thanks T, that does help, nervous looking profit taking into the close.

  148. 148
    zman Says:

    Nicky – glad you added that lower level on the SP. Man did they crush back the days gains in the last 15 minutes.

  149. 149
    Popeye Says:

    Fidelity has almost 5 times the size of the next largest shareholder. (HK)

  150. 150
    BirdsofpreyRcool Says:

    Fido luvs Floyd

  151. 151
    BirdsofpreyRcool Says:

    Fair 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.

  152. 152
    zman Says:

    We’ll miss ya BOP, beerthirty.

  153. 153
    West Says:

    BOP r u going to rearrange your antelope at kog on your travels?

  154. 154
    PackMan Says:

    HK – 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 ….

  155. 155
    PackMan Says:

    110 — that is hilarious !

  156. 156
    Para Ma Says:


    […]check below, are some totally unrelated websites to ours, however, they are most trustworthy sources that we use[…]……

  157. 157
    m88 Says:


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