Thursday Morning – Niobrara Thoughts Part 1

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Market Sentiment Watch: China GDP grew 11.1 year over year implying slower growth in the second half of 2010. Economists have been worried about China's economy rolling over and I'm reading the word bubble more and more again. On the other hand, in the realm of energy, I see little to indicate a Chinese melt is occurring. JPM opened the door for financial 2Q reports with a blow out numbers this morning but much like after the INTC results, the market seems to need more time digest good earnings numbers juxtaposed with a string of not so hot economic reports.  This morning's slew of economic data show a very mixed bag:

  • Jobless claims came in at 429,000 vs 445,000 forecast  and 454,000 last week
  • PPI was off 0.5 vs down 0.1% expected; core was in line at up 0.1%.
  • Empire State Index dropped to 5.1 vs 18.8 forecast
  • We get Industrial Production at 9:15 am EST, forecast is - 0.1% and then Philly Fed at 10 am EST, forecast is 10.0.
  • Nuthshell: Better claims number a minor positive, economist should not bother predicting ESI and the dollar should probably come further off in the end.


BP Spill Developments Watch:

  • House Natural Resources Committee Slaps BP's Future Ability to Pay Future Compensation and Cleanup Costs. The committee passed a 7 year ban on new leases for the offshore U.S.This must get through the rest of congress and the president before becoming law.
  • Pressure Test Delayed: Test began late yesterday afternoon, but stalled out due to a leaky valve in the new ram stack. BP plans to fix the value and move ahead with the test hopefully today.
  • Also overnight, BP admitted that it lobbied for the early release of the Locherbie bomber and bought a cellulosic biofuel outfit in California for $98 mm.


In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. EIA Oil Storage Review
  4. EIA Natural Gas Preview
  5. Stuff We Care About Today- Niobrara thoughts, RRC, NXY
  6. Odds & Ends

Holdings Watch ZCAT (Zman Catalyst portfolio)

  • $6,700
  • 78% Cash
  • Yesterday’s Trades: None

ZIM (Zman Inefficient Markets portfolio)

  • $6,600
  • 26% Cash
  • Yesterday’s Trades: None

Commodity Watch

Crude oil eased $0.11 to close at $77.04 yesterday. The front month now looks like this. This morning crude is trading up slightly.

Natural gas inched off another $0.05 to close at $4.31 yesterday. Today prices are trading up slightly early but will hinge on the storage report (see below)

  • Tropics Watch: Still quiet, still too much dry, dusty air over the mid Atlantic for tropical formation.

Natural Gas Inventory Preview:

I'm at 77 BCF.

  • Weather:
    • Last week: 88 Cooling Degree Days vs 70 Normal and 59 a year ago.
    • Last week was the warmest of the year so far, second to 80 CDDs we saw for the week ended 6/26. That week, which contained no holiday, saw an injection of 60 Bcf.
  • Imports: Down 0.1 Bcfgpd as LNG volumes fell to their lowest level of the year.
  • Holiday: The July 4th holiday will deduct a day's demand from the industrial and some of the industrial pieces of the puzzle, probably resulting in a 20 Bcf larger injection than we would normally have seen.


  • Last Week: 78 Bcf Injection
  • Last Year: 88 Bcf Injection
  • 5 Year Average: 80 Bcf Injection
  • 10 year Hi: 108 Bcf Injection
  • 10 year Low: 53 Bcf Injection

Street is at 81 BCF.

Oil Inventory Review

ZComments: Not a great week for the bulls as numbers go, both products saw demand fall substantially although I do think gasoline is more of a post holiday stocking slump than an early season reversal of trend. The crude number wasn't as good as it looked on the surface as it was in part driven by a slump in imports that will likely reverse out next week as the Gulf Coast catches up on imports from Mexico that were delayed by recent tropical turbulence.



Gasoline: -


Stuff We Care About Today

Niobrara Players and Play Thoughts (Part I):

  1. This is a play spread across 5 counties in Wyoming (Converse in the north down to Niobrara, Platte, Goshen, Laramie) and 1 county (Weld) in Colorado.  (see county map of the area here ---)
  2. In short, many are call this a neo-Bakken play. Jury is still out on that and EOG for one is being more circumspect than usual on the play's potential.
  3. Play Type: Layered shale, limestone, and chalk play at widely ranging depths across the about 11 mm total acres. Produces from 4 tight chalk zones with the shale acting as both source and seal. Note that while it is still early as far as horizontal development goes, the play appears to be far from  homogeneous. Porosity and perm vary widelyIt varies from section to section and county to county but is thought to encompass most of the six counties listed above pinching out on the eastern side.  There is however a high degree of well control (at least in the southern two counties (10,000+ verticals in Laramie and Weld counties between Silo Field and the old Wattenburg Field) so drilling dry holes will be less than likely although you may wind up with some uneconomic results outside of the hotspots. Not surprisingly, activity is at first focused on these areas previously vertically drilled up areas first .
  4. Land getting pricey: we've gone from the $30 to $50 / acre range late last year to as much as $2,500 in places like Weld County (which may yet prove justifiable) to SSN's 24,000 acre pending sale in Goshen County which has an implied per acre value of $2,500 to $3,275.
  5. 2.4 mm net acres (3mm + gross) have been leased by the major players (see table below)
  6. NBL is the biggest acreage holder by size.
  7. EOG appears to be the most active permitter and driller in the play
  8. PETD, REXX, and SSN  are the most leveraged (more on this tomorrow in Part II) and all three plan initial spuds prior to year end.
  9. EUR's range so far (and again it is early) from 290 mboe to to as much as 567 mboe (1 CHK comment)
  10. Well costs vary somewhat widely so far as some of the wells are flowing naturally due to natural fractures. EOG is drilling short lateral un-stimulated wells for completed well costs for half the price of a long lateral, 30+ stage frac Bakken well at about $3.4 mm.
  11. Results to date: Pretty decent this early in the life of the once vertical, now horizontal play.
    1. EOG - Three wells to date, two unfracced at 1.5 and 1.1 mboepd IPs (the Jack well did 50,000 boe in its first 90 days, and a third fracced well at 730 boepd (figuring that's a function of location)
    2. SM - reported oil production while drilling (they were underbalanced to keep from damaging the formation with all its natural fractures. --
    3. NBL - 1 rig dedicated to drilling horizontal, four wells so far with decent IP's and lowish costs. 
    4. CHK - one well in Comverse---County, no IP released, estimating 567 mm BOE (about the size of a nice Bakken well) and CHK has already gone on to claim a billion barrels of reserve potential on its 400,000 acres. When you absolutely, positively have to get oily in a hurry because all of your investors expect you to the answer is simple. Drill one well and extrapolate. Sorry Aubrey, I kid because I love. No rigs running now but that should change late 2010.
    5. SM - First well results do on 2Q (should be a busy 2Q as they will release a high profile Granite Wash well as well - see Catalyst List.
    6. PETD - analyst day today. Stock has been creeping up in anticipation.
    7. SSN - 16,000 acres in Goshen that may still see a JV. We should get a development schedule for their first spud later this year in the near future.

Nutshell: Will be listening closely to the EOG, SM and NBL 2Q conference calls closely for recent drilling, have dedicated a tab on my market watch to the Niobrara (as I have previously to the Bakken, Eagle Ford, Haynesville, etc). Currently I'm long SSN for exposure here which while it has worked out is not exactly what I'd call a safe bet and I'll be adding more non single-digit-midget exposure in the near future (most probably PETD, SM, and maybe REXX who I've been no big fan of in the past.


RRC Operations Update

  • Record quarterly production, up 472 MMcfepd, up 9% sequentially (up 13% adjusted for sales)
  • Guidance was 450 to 455 MMcfepd
  • 2010 exit rate guidance of 180 to 200 Mcfepd net from the Marcellus is unchanged from recent past comments.
  • Price realizations look fairly decent given 2Q NYMEX prices
  • Hedges:

    • 2010: 77% of expected 2H10 volumes hedged at $5.54 (this looks boosted but don't have the detailed tables yet)
    • 2011: 51% @ $5.73 (this looks unchanged ... makes sense to wait for a boost in the strip and 50% at this point for next year is bigger than most of their peers have gone so far)
  • Nutshell: Should be pretty well as everyone like volumes in excess of guidance, will likely, as usual, partially steal the thunder from earnings day. May be worthy of a quickish trade (maybe a week long trade) in Augusts but I'll wait to see today's gas number first. There was no update on recovery rates or well results at all so maybe there will be a little thunder on the call as well.  


Other Stuff

  • SD / ARD shareholder votes on the proposed merger today. Expecting approval, should give the share of both a further boost.
  • SSN update - we saw the first close of a buck yesterday ... still waiting on share allocations from the rights offering and for word that the deal to sell 60% of their Niobrara acreage is done.
  • NXY - 2Q earnings, 9 am EST. Not one of my names so no review but worth a listen
  • Catalyst Watch has been updated for the latest list

Odds & Ends

Analyst Watch:

  • WLL - Initiated at Oppenheimer at Outperform with a $95 target.

Interesting Reading Watch

192 Responses to “Thursday Morning – Niobrara Thoughts Part 1”

  1. 1
    ram Says:

    "72% of Gulf Residents Disapprove of Moratorium", unfortunately for them, they live in "red" states.

  2. 2
    zman Says:

    NXY – call started, will pass along any macro comments.

    PETD – analyst day starts at 10:30 am EST.

    BP replaced leaking hose on 3 ram stack, expects to start test this morning.

  3. 3
    bill Says:

    robry still at + 88

    August natural gas futures are expected to open 3 cents higher Thursday morning at $4.34 as traders await the release of inventory data that some speculate could send the market sharply lower. Overnight petroleum markets drifted higher.

    Although estimates of Thursday’s Energy Information Administration (EIA) gas storage report fall below last year’s and also the five-year average, there are a few who are calling for the 10:30 a.m. EDT release of data to exceed what appears to be the critical 80 Bcf level. A Louisville, KY, trader said an injection of 80 Bcf or more would “likely send gas futures tumbling.”

    It could be close. A Reuters poll of 26 analysts revealed an average of 78 Bcf with a range of 55 to 90 Bcf. A similar Dow Jones survey showed an average 76 Bcf from a sampling of 25 traders and analysts. Jim Ritterbusch of Ritterbusch and Associates is expecting a build of 82 Bcf, and Kyle Cooper of IAF Advisors in Houston is anticipating a gain of 85 Bcf. These will be compared to last year’s 88 Bcf injection and a five-year average of 89 Bcf.

    As uninspired as Wednesday’s futures trading may have seemed, some traders seem to be positioning themselves for a decline, perhaps following the release of the EIA report. “We only had an 8-cent range, but some guys are starting to scoop up the August-September spread. They were buying the spread at 0.6 cents and it has widened out to 1.3 cents bid at 1.4 cents offered,” said John Woods, senior trader at McNamara Options in New York.

  4. 4
    zman Says:

    V – Sounds like NXY’s bitumen program is running a bit better than expected.

    On oil sands, phase II starting with smaller SAGD increments (basically smaller chunks of capital required).

    Shale Gas – 8 well pad drilling going well, drilling longer laterals faster, and able to use frac equipment more efficiently. You’ll hear a more convincingly pointed argument for this from ECA when they report.

    Calling their recent Appamatix discovery their best yet in the Gulf. Development drilling now is delayed by the moratorium.

  5. 5
    zman Says:

    Thanks bill. I do think part of the higher estimates this week stem from the fact the estimates come from sell side analysts who bricked last week and would rather see higher gas (if you look at their price decks for the second half). So setting the bar high and getting it wrong is better than being too aggressive. Next week we have no holiday and again the warmest temps of the year to deal with, so that should mitigate a drop in price due to a miss on storage today. The Robry # is different in that he’s not motivated by anything but being right so that’s a concern as he’s good. But again, the market should look to next week for some support. I don’t see a breach of $4.

  6. 6
    zman Says:

    Analyst Watch:

    BP – Citi maintains Buy rating, says “relief is at hand”.

  7. 7
    bill Says:

    the sd/ard vote is tomorrow 10 am oklahoma time

    july opions expire tomorrow. i dont know if i should hold for the vote or sell pre 10’30 today


    Such holders will be entitled to vote at their respective company’s special stockholders meeting to be held on July 16, 2010.

  8. 8
    zman Says:

    Bill – I haven’t played yet. I expect them to get it done and for it to be a modest positive for SD near term and a positive for them long term. Lost track of my calendar, it is on the 16th and today is the 15th, gotcha, thanks.

  9. 9
    bill Says:

    hk down 25 % in 3 months.. yuck!


  10. 10
    zman Says:

    “Like everybody, we all want to know what the regulatory environment is going to be like with a little more specificity than we have now” – NXY on the Gulf of Mexico.

  11. 11
    zman Says:

    re 9, yeah and the move doesn’t make a lot of sense in that they have done everything they promised the Street they would do and Floyd has basically promised not to do an equity deal this year or next.

  12. 12
    BirdsofpreyRcool Says:

    GST — starting to get some notice. This out from R&R (notice the last comment… it’s an allusion to the Glen Rose and EagleFord potential) —————–

    Rodman & Renshaw initiates GST with a Mkt Outperform and price target of $5.75 saying the co is a small-cap E&P company with assets primarily in East Texas, where it targets multiple stacked pays including the Deep Bossier, and Appalachia, where it is focusing on the Marcellus Shale. They say the co hasn’t been immune to the group’s recent pullback, and they think its current valuation provides an attractive entry point as they currently see ~40% upside to their tgt. Firm sees material upside potential in the Marcellus Shale, and says East Texas could have more than just the deep bossier.

  13. 13
    zman Says:

    Thanks BOP – think it’s time for a back of the envelop read there?

    Any credit or head trader comments this am?

  14. 14
    bill Says:

    from tudor

    Can’t kill a well by committee – Once the relief well is ready to start actual kill operations, we hope BP is fully in charge and the government backs off and lets contractor Boots and Coots kill the well. Reminder: the guy killing the well is 40 for 40 in his career…he does not need to consult with the government every six hours. In fact, we’re having a hard time thinking of any example where continuous consultation with the government results in a better outcome/process.

  15. 15
    zman Says:

    re 14. LOL.

    S&P back to spikey, disjointed trading. Summer continues.

    Oil and NG up but barely this am, no lead from the equity markets for oil and the gas storage number to contend with for gas.

  16. 16
    bill Says:

    rrc down 2.8 %
    hk down again

  17. 17
    zman Says:

    Whole group red with S&P, stocks tracking broader indexes with oil, not paying attention to gas yet. Group not getting much notice today, notably WLL off a buck on an Opco Buy initiation. Opco isn’t wrong liking the cheapest name in the Bakken but the market is in summer mode and could care less.

  18. 18
    zman Says:

    BP thoughts: End of the day, when the well is capped, either today temporarily or by mid to late August, APC probably gets more of a bounce than BP. Mitsui has APC them in giving BP the stiff arm on their compensation sharing request and to my knowledge, APC hasn’t been involved in freeing a known terrorist to secure an oil deal which is the latest news out of BP (the second half being implied but not proven). The well capping however may set up a belief in a Merger Monday event next week for BP so that thought could give us a rally into the close tomorrow. Assuming it’s capped, part of unquantifiable liability will at least be better ballparkable by the interested suitors.

  19. 19
    BirdsofpreyRcool Says:

    z #13 — HeadTrader is sipping coffee and trying to stay awake. To say it’s “slooooow” implies there is movement at all. There really isn’t. Only computers, throwing shares back and forth at each other.

    People like credit a whole lot more than stocks, tho. Credit has seen a huge positive move over the last month. Started this morning strongly green…. now trading slightly red, with stocks. TED is still flat, holding around the +37.5 bps area. So not a lot of news content we can draw from credit today.

    The whole FinReg POS thing-y is supposed to pass today. About the only thing it does is to explode the size of govt and govt control over individuals even larger. But, ho-hum. Same old-same old. Is it November yet?

  20. 20
    JD Says:

    This is not energy related but an example of how I look at charts in addition to fundamentals:
    Apple (AAPL): A Three Hundred Yard Drive?
    (July 13, 2010)
    “He knew he could do it. Three hundred yards off the tee wasn’t that big of a deal for a lot of folks these days, especially if the wind was with you. But there is a creek that crosses the fairway at about 280 yards and curves up the left side of the green, and there is a deep sand trap which curves from the front of the green around the right side. So what. 300 yards, with a little wind at your back, a birdie is a given, an eagle is a strong possibility, and a hole-in-one…well.”
    From Dec 2007 to Jan 2008 AAPL fell 40% in one month and 62% in 9 months. My point is to see historical patterns and recognize that psychology is reflected in the markets. The markets reflect investors’ opinions, their strongest emotional opinions as they are exemplified by where they put their money.
    Then if you are aware of the sand traps and the water hazards, you know where to hit the ball and where not to hit it. AAPL for example could go to $300, maybe like a 300 yard drive, but a 270 yard “lay-up” might be a good idea on this one right now.

    Apple Should Blow Away Consensus, Again by Andy Zaky (From Seeking Alpha, June 22, 2010)
    An early analysis of Apple’s Q3 2010 seems to indicate that Apple is on tap to significantly beat analyst estimates yet again. Last quarter was one of the biggest blowouts I’ve ever seen Apple report, and if major upward revisions don’t start rolling in, it appears that Q3 can give investors another staggering halt-trading type blowout.
    (I cannot attach the chart?!?! but pls feel free to email me at jdeuschle@comcast.net if you would like me to send it to you. I think it is a really good example.)
    What I see in the chart below is how similar the current pattern is to the one at the end of 2007. I am not saying history must repeat, but simply to be aware of the similarities.

    In my quest to maximize investment returns while mitigating risk for my clients and family, I utilize fundamental and technical data to generate what I refer to as a common sense meter to help me determine where to allocate investment capital. By analyzing this long-term chart and referring to the old adage, Buy Low and Sell High, I would be a better long-term seller than a buyer at these levels. Short term analysis may be different. I look at every detail I can, but what stands out the most to me on this particular chart is the extremely high level of the blue MACD at 33.99 below. I am not saying AAPL cannot go higher from here, but downside protection should be considered.
    Make a good one,
    Deuschle Capital Management

  21. 21
    milepost_43 Says:

    WPRT…I missed the train AGAIN…AAARRRGGGHHH

  22. 22
    zman Says:

    Thanks BOP – where does you cross asset guy put the S&P relative to the credit markets now?

  23. 23
    BirdsofpreyRcool Says:

    Oh… yeah… CIGX update. Company being HIGHLY secretive on launch date. They absolutely freaked out, when a picture of their CigRX product was posted on the internet the other day. They had cyber-police out looking for the poster… Anyway, I only mention this because they just aren’t saying anything about when the product is officially launched. We thought it could be this week… next week… probably before Aug 1st. But can’t know for sure, ‘cuz people at company just aren’t saying (as they shouldn’t — this is a Big Deal — and they want to get it right).

  24. 24
    zman Says:

    MP – me too, did a major reshuffle of my market watches and seem to have misplaced that ticker and CLNE. Thanks for the reminder.

  25. 25
    zman Says:

    re 23. And this product would keep the temples of CEO’s from exploding as new regulations are handed down? That should be hot.

  26. 26
    BirdsofpreyRcool Says:

    XACS#1 puts the SPX at about 1120, based on the credit rally. But he is also looking at bank CDS and not liking what he sees… so, he’s discounting the correlation between SPX and the Investment Grade CDS Index, based on that. Bank CDS are predicting a rocky next month or two. (Like that is “news” to anybody.)

  27. 27
    BirdsofpreyRcool Says:

    #25 — I intend to be a heavy user myself.

  28. 28
    zman Says:

    Thanks BOP

    Philly Fed as ugly as Empire State, coming in at 5.1 vs 10.0 expected.

  29. 29
    blackgold39 Says:

    BP not up enough yet to save my July spec plays. I think I have already cashed in on their beatdown as much as I am going to.

  30. 30
    BirdsofpreyRcool Says:

    CIGX cont’d … Point is — until the actual product launch, the stock could do anything. It’s just speculators and short sellers. Actually, the short interest ticked UP from last month. Who the HECK sells short a $1.50 stock?? Apparently, computers cruise data bases, looking for companies with no revs, cash burn, and large market caps. Only a mindless computer would be short this stock down here. It’s insane. For a short-seller, the UPside is only 100% (at BEST), but the DOWNside could be 300…. 400…. 10,000 percent (depending on when they decide to cover). Anyone who takes that sort of asymmetric payout risk (where your downside so far exceeds your upside) is just plain CRAZY.

  31. 31
    zman Says:

    BG 39 – possibly for the time being. Should be an opportunity for at least a quick pop if bpspillcam shows no volumes billowing, simultaneously carried on CNBC, FXO, CNN etc.

    Watching the choke line billow now.

    Gas numbers in 25 minutes. NG off slightly.

  32. 32
    Jerome Blank Says:

    RE: #23, BOP, thank you for the CIGX update…

  33. 33
    elijahwc Says:

    #21 on WPRT

    On briefing the following is showing up with regard to the Pickens Plan:

    CLNE Clean Energy Fuels shares being picked up on potential for Pickens Plan inclusion in energy bill -Update-

    The Energy bill is coming front and center in Washington ahead of midterm elections. There are numerous news stories this morning indicating that the Obama Admin and Senate Democrats will attempt to introduce an energy bill that, while smaller than what was previously envisioned, will highlight clean energy projects. In fact, the stories indicate that Sen Harry Reid is looking to include some aspects of The Pickens Plan, including the expanded use of natural gas. As a result of these stories, shares of CLNE, a provider of natural gas for vehicles, is gapping higher this morning (up 5.8%).We would point out that Pickens owns 32% of CLNE shares outstanding.

    While this bill is in its early stages, advancements in it could come quickly due to the upcoming elections. CLNE shares being picked up on potential for Pickens Plan inclusion in energy bill; other names with nat gas exposure could see interest as well: EXH, FSYS, CHK, DVN, EOG, SWN, PXD, NBL, ECA, LINE, and NGAS.

  34. 34
    scoop006 Says:

    any word from Nicky

  35. 35
    zman Says:

    Bill – if Robry is right, then SWN (still largely unhedged) puts may be in play. I’m not doing that but it’s a thought on leverage to gas prices. Right now, stocks are all about the broad market.

  36. 36
    zman Says:

    Scoop – email sent but she is still on vacation I think. Her last message yesterday was:

    “1150 – 1200 looks on by end of first week in August. 16th -19th could be a high or a low. Pullback should take us to between 1050 – 1075”

  37. 37
    zman Says:

    PETD on the tape with some below Street numbers. Planning on listening to their analyst day call starting at 10:30 am EST.

  38. 38
    zman Says:

    Interesting to see WHX ticking back up despite a $2 off sale on crude. $16 to $19 in the last week, still recovering from the unrealistic expectations of two analysts who downgraded it mid May. Still looking at about a 13% forward yield.

  39. 39
    zman Says:

    JB – Can I get a read on KOG?

  40. 40
    zman Says:

    Nice move in the CLNE, JD added that a little while back, I am still dragging my feet. If you group the name with the rest of the clean energy stuff found in the TAN and GEX it has easily outperformed.

  41. 41
    zman Says:

    Gassy names off anywhere from 1 (HK) to 3% (RRC). Inventories in 2 minutes.

  42. 42
    zman Says:

    78 Bcf.

  43. 43
    bill Says:

    robry was way off…zman bullseye

    first time he missed by so much

  44. 44
    zman Says:

    Street was 81
    Robry was 88

    So I got lucky with my 77 Bcf number, glad to see the model still working.

    Next week should see a much smaller number.

    NG rallying.

  45. 45
    zman Says:

    Bill – thanks. To Robry’s credit, he is very accurate most of the time and his model is superior to most if not all I have seen. I no longer run that kind of heavy statistical model … no serfs around here to hunt down and plug all the variables and I find them to break just as often as the simpler ones. Also, it was a holiday week and those are pretty squirrely to predict.

  46. 46
    zman Says:

    Gassy stocks so far yawning at the report and at the prospect of a better number next week. Broad market weighing.

  47. 47
    zman Says:

    PETD analyst day call started.

  48. 48
    zman Says:

    Actually about to start:

  49. 49
    zman Says:

    BP just looks like it wants to launch. Up 2% against this market and they have not yet started the test.

  50. 50
    zman Says:

    Taking notes on PETD, will shut up for a bit.

  51. 51
    choices Says:

    Somewhat dire commentary from Dick Bove


  52. 52
    1520sbroad Says:

    ONe of my favorite leading commodity hot money indicators has started to go off – POT positive against a bad tape. POT got pretty oversold in the June swoon. Like to see some of the other commodity groups pick up – nat gas in particular…

  53. 53
    md Says:

    I missed a lot of the discussion on CIGX.
    What are your thoughts about the patent infrigement lawsuit against B&W.
    Is the upside based on FDA approval.

  54. 54
    blackgold39 Says:

    BP rocketing

  55. 55
    1520sbroad Says:

    Z – you hearing anything about SWN and their new brunswick r&d?

    Only thing i have seen is some local press up there in canada about SWN doing field testing with probes planted in the ground. SWN has also been doing a lot of boots on the ground work shaking hands, town hall meetings etc. with land owners.

  56. 56
    blackgold39 Says:

    BP venting something out of the alternate choke line, caught it on the Skandi 2

  57. 57
    zman Says:

    1520 – No, should hear on their call about timing of actually turning to the right, thinking it is a ways off. Also should hear if they plan to drill a little and then monetize the rest of their E. Texas HS/Bossier play. Stock should be moving on this gas number but is not yet, NG now up 25 cents.

  58. 58
    zman Says:

    BG39 – yeah, oil, they closed the middle ram which shut in the main riser last night. Pressure still just under 3,000 psi, will be seeing that rise to 6 to 9,000 later this morning … hopefully, if they can move forward.

    You can watch all of the feeds at once here:

  59. 59
    zman Says:

    Hey Bill, HK actually green.

  60. 60
    1520sbroad Says:

    #57 – i’ll be listening closely to that call…

  61. 61
    zman Says:

    See a second outlet billowing oil now. This is a choke line that had been hooked overnight to a collection vessel. Unhooking that is a step leading up to the pressure test.

  62. 62
    blackgold39 Says:

    That was the alternate line I was referring to.

  63. 63
    zman Says:

    Still listening to PETD opening, interesting, not earth shaking, about to get into the plays.

    BP Affect Watch: If they cap the well today, I would bet we get a nice uplift in the broad market and in the group. Offshore rigs and other names like OII should bump up, along with BP itself and APC, RIG, HAL.

  64. 64
    zman Says:

    BG39 – Thanks, I realized that when I reread your comment after they panned over and I saw that one. Too bad James Cameron isn’t filming this in hi-def.

  65. 65
    Jerome Blank Says:

    Re: #39, KOG, Zman, having all kinds of trouble with KOG data…TOS having problems and I don’t see any trade data today at all on stockcharts…will update KOG as soon as I have good data…

  66. 66
    blackgold39 Says:

    Sure would look better with Fern Gully creatures turning the knobs instead of ROVs

  67. 67
    zman Says:

    BG – yeah, Zoe Saldana would seal the deal on most watched video stream in the world.

  68. 68
    elduque Says:

    quick ?- GDP is ok isn’t it? I am thinking of grabbing some SWN and GDP for a NG play. I already have enug HK>

  69. 69
    zman Says:

    Gripe of the day.

    Coast Guard on the tape saying the new cap was never intended as a shut in measure for the well, only a step towards 4 vessel containment after the pressure test.

    This is what BP has been saying all along but recently, comments from the Coast Guard have been all about shutting the well in via the cap.

  70. 70
    zman Says:

    Eld – I don’t own any GDP, there’s more risk on the ability to achieve their growth targets than with either an HK or especially with a SWN. But with more risk, you may get more reward, still huge short interest in the name. I don’t see a run up, other than the occasional storm related spike any time soon and so nothing to really prompt a cover.

  71. 71
    zman Says:

    Senate votes to end debate on FinReg.

  72. 72
    elduque Says:

    Thanks Z

  73. 73
    zman Says:

    Looks like they are getting ready to activate another ram (Boa Deep C Rov 2 camera). If the oil flow cuts out and it hits the headlines, I plan on selling the July’s best efforts and holding the Augusts a bit longer.

  74. 74
    Jerome Blank Says:

    KOG, really wierd trading data re KOG, one moment KOG is at $3.15, the next at $3.24, then the bid/ask disappears from my active trader screen, still no data on stockcharts, anyone else having problems with KOG data? $3.15 seems to to be the current price…

  75. 75
    zman Says:

    Actually, not a ram, but a valve to turn off that flow that was going to a hookup line. Glad this vid show is on, hard to stay awake.

  76. 76
    BirdsofpreyRcool Says:

    md #53 — have been on a conf call… sorry about the delay.

    CIGX is no longer all about the lawsuit. The lawsuit is not even part of the investment thesis discussion, at this point. It’s all about their about-to-be-launched product, CigRX. It’s a “nutritional suppliment” or “neutraceutical” derived from extracts from the tobacco leaf. As such, it is regulated by the FDA, but falls into the category of something NBTY would sell over-the-counter. It has already been approved for sale. CigRX will be sold as an aid for people who want to quit smoking. But there is the potential (both proved and yet-to-be-proved) that the tobacco-based compound can do a lot more.

  77. 77
    zman Says:


    Added (100) BP July $40 calls for $0.07, with the stock at $37.30. Obviously high risk.

  78. 78
    Geno Says:

    looks like BP has initiated the choking procedure

  79. 79
    zman Says:

    Geno – yeah. They should have gone with your method a month ago.

  80. 80
    Geno Says:

    nobody listens!

  81. 81
    bill Says:


    C Rov 2 camera). or the pressure guage

  82. 82
    zman Says:

    Bill – probably the gauge and the Skandi camera shots.

  83. 83
    Geno Says:

    Both, pressure is above 1000#, when they get this choke shut in they will be looking for a substantial pressure increase. I would think at least 2-3 thousand pounds.

  84. 84
    zman Says:

    Hey Geno – are watching the gauge on the Hos feed? That one is just over 1,000 now. But on the Oly cam, the reading has been at just under 3,000 (outlet for awhile). I’m not sure what that first one is measuring.

  85. 85
    VTZ Says:

    RE NXY – I haven’t had a chance to look or listen yet.

    RE the Goldman oil sands “scarcity” argument from the other day – I’ve reviewed and it’s the exact same argument I’ve been making since the dawn of time. It’s just more clear in the wake of Macondo.

    I still think the SU CNQ etc shares are way undervalued because even with the GS new “scarcity premium” they are only adding ~5% to their market values. Ultimately, my problem with the valuation of oil sands is that the life of the asset is essentially meaningless given the discount rates used, when in reality you are buying an asset that will naturally generate increasing cash flows (due to “scarcity” as GS would put it) with a relatively marginal sustaining capital expense. Additionally, they all have the assets by which they can grow. There is no exploration risk, which would play into “scarcity”.

    I don’t know what genius just thought up this “scarcity” argument, but it’s becoming clearer and clearer by the day that I should be dreaming up notes for Goldman part-time so that their oil sands analyst can go comment on other industries he knows nothing about.

    RE 52 – I sold calls against my POT after the first 5 days of this mini-rally because it has looked so weak lately and now I’m losing my shares for a 1.50 discount to what I would have got even taking my premium into account. But I bought additional as it crossed my breakeven for the options. Nice to see it behaving nicely, but that being said, the chart still looks awful nasty.

  86. 86
    Geno Says:

    z – not too familiar with offshore stuff but I do recall when they had the original cap on the well with pressure guages they read around 2500# It would make sense that as they shut the well in both guages should start to read higher pressure.Long story short, the Hos feed might be reading back pressure.

  87. 87
    zman Says:

    Housekeeping Watch: Twitter

    We have a twitter feed at keyword

    On this site I post the occasional site teaser.

    We will soon have another feed at keyword

    This one will go out with the email notification of trades in addition to the emails and texts that already go out when I do a trade. This will be a subscriber only feed. You can sign up now but it will not send blasts until further notice.

  88. 88
    1520sbroad Says:

    VTZ – POT can be hard to take sometimes. I have been long shares for years and write calls against them. Takes some of the volatility out of the long term hold – their options are great to trade as well. My shares are currently naked and I am contemplating the cover point…

  89. 89
    zman Says:

    Thanks G, much appreciated.

  90. 90
    rseidman Says:

    For those with time on their hands:
    Pickens latest http://www.pickensplan.com/boonecam/2010/07/15/boone-goes-back-to-the-whiteboard/

    Good presentation, IMHO

  91. 91
    zman Says:

    Thanks RS, got the email, have not yet perused.

  92. 92
    Nicky Says:

    Afternoon to all.

    Support at 1070 – 75. Resistance now at 1088.

    I am actually looking for a short 1 – 3 day correction to play out which looks like it will take us down into the 16 – 19th July (although its too soon to confirm whether those dates will mark a high or a low) and then a move higher. The next move up should take us to 1150 – 1200 and last into mid August.

  93. 93
    zman Says:

    Re 90. Love the part where Boone says we are trying to help the president live up to his promise made in 2008 of getting off OPEC oil in 10 years.

    Welcome back Nicky and thanks much.

    Boa Deep C rov 2 showing something odd, looks like a leak.

  94. 94
    zman Says:

    Marketwatch saying BP and APA close to $11 B asset sale.

  95. 95
    Nicky Says:

    A 50% correction would take us back to the 1060 area…

  96. 96
    blackgold39 Says:

    Not sure what that coil was they kept inserting in the pipe either, shown also on BDC 2.

  97. 97
    zman Says:

    BP – there’s a Bloomberg story saying the sale to APA which may include half of Prudhoe Bay may be announced next week.

    BG – fascinating to watch as they might as well be operating on the moon. Thought at one point I saw a flash of light in there, like from a mini arc welder. Can’t be. Boy am I getting a lot of work done today.

    The TBP presentation was pretty good, basically saying he’s convinced the public via his town hall meetings. I have to say that when I met him here he had me at hello.

  98. 98
    zman Says:

    Nicky – would a close over 1088 today negate the rest of the wave down?

  99. 99
    zman Says:

    Natural gas up 30 cents or 7%, at $4.60. Oh what a difference a few Bcf make. Broad market trying to put on a post lunch push which is good since it’s only down because economists can’t forecast Empire State or Philly Fed or anything else that doesn’t smoothly trend. Natural gas stocks caged by that on what should be a good day for them.

  100. 100
    VTZ Says:

    In light of the Fed’s comments that they are contemplating more efforts to stimulate growth, my money says that mortgage purchases or something similar is back on the table and that’s what the rally is based on.

  101. 101
    Geno Says:

    Boa Deep C – this can’t be good

  102. 102
    zman Says:

    re 101, Geno, did you see dust on the ocean floor or did you think that was a seep?

  103. 103
    zman Says:

    Looks like that was just mud kicked up by the ROV.

  104. 104
    Geno Says:

    Thought it was seep, but it has cleared up. Must have been a rogue plume

  105. 105
    Geno Says:

    Bet that had the boys at BP talking!

  106. 106
    zman Says:

    Pressure, ticking back up. Yeah, thought they had a real problem for a moment. Well, more of one.

  107. 107
    skimo Says:

    anybody see any movement in the SSN allocated shares?

  108. 108
    zman Says:

    Ski – no, my account still shows a full load of the rights.

  109. 109
    skimo Says:


  110. 110
    zman Says:

    This is pretty informative:


  111. 111
    nifkin Says:

    any thoughts on the coal name weakness

  112. 112
    zman Says:

    Nifkin – not really, more bad news for MEE but they are the BP of the coal mining industry so more fines and penalties should be expected on a weekly basis. In general, the weakness of the late, despite the very recent small rally, seems well overdone, based on China worry and not product pricing or volume movement facts. WLT still the most interesting name in the space to me and it has been slammed in the last few months.

  113. 113
    zman Says:

    …so I’m planning to be on the usual quarterly conference calls (BTU, ACI, WLT) and see if I see a reason to get back long.

  114. 114
    nifkin Says:

    thank u- good call on gas number by the way…

  115. 115
    zman Says:

    Thanks Nifkin. Good to be right/close, even if it doesn’t seem to matter to the market.

  116. 116
    zman Says:

    Boa C now – that sure looks like oil.

    BP on the tape saying it is starting the integrity test now.

  117. 117
    bill Says:

    The Interior Department’s chief oil and gas regulator said Thursday that BP plc must pay royalties on all oil and natural gas captured from the damaged Macondo well in the Gulf of Mexico. The company also is potentially liable for royalties on lost or wasted oil and gas from the well if it is determined that negligence or regulatory violations caused or contributed to the Deepwater Horizon explosion and resulting oil spill.

    Michael Bromwich, director of Interior’s Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM), notified BP America’s tax department in a letter that said failure to fulfill these obligations could be considered knowing and willful violations of the Federal Oil and Gas Management Act. BP is required to pay royalties immediately for oil and gas captured from the Macondo well, he said.

    BOEM did not tally the royalties that BP would owe the federal government from the Macondo well, which has been spewing oil since April 20.

    BP also “is required to report immediately to BOEM all oil- and gas-related activities associated with the Macondo well using Form MMS-4054,” Bromwich wrote.

  118. 118
    bill Says:

    I think BP will sell everything in usa and move on to friendlier places like Lybia and Venezula, iraq

  119. 119
    zman Says:

    re 117. Seems fair. It’s the U.S.’s oil to tax and they’re wasting it. I think they should worry about that down the road but that’s semantics.

    The tally on 3 months at 50,000 bopd at $75 oil would be $63 mm at an 18.75% royalty. Not sure if the well is eligible for royalty relief on the first cost recovery piece of production but if I was BP, I wouldn’t ask.

  120. 120
    zman Says:

    Bill – right, the fact that they are the biggest oil producer in the U.S. shouldn’t stop them. I wonder what kind of assurances APA will get on the Alaska stuff. I’d be leery of that infrastructure.

  121. 121
    jy Says:

    Well at least Bromwich is getting the form nomenclature memorized. Always the first step for a bureaucrat in a new agency!!

    “….BP also “is required to report immediately to BOEM all oil- and gas-related activities associated with the Macondo well using Form MMS-4054,” Bromwich wrote.”

  122. 122
    RMD Says:

    121: I wonder if joining the Gov’t just instantly makes you stupid?

  123. 123
    RMD Says:

    coal weakness may be OXF pricing at the low end of the range and opening and trading down.

  124. 124
    zman Says:

    Re 122 – I can confirm it does not. I know a number that are smart. I think the ones that are were born that way.

  125. 125
    zman Says:

    RMD – Re coal, it is a small group so maybe so.

  126. 126
    RMD Says:

    PETD’s presentation seemed to me to mainly blames lack of production growth for the stock’s bottom quartile valuation. Several of those in quartile 4 (which I have been looking at) might go-to-school on their strategy if the St. continues to pay att’n to PETD.

  127. 127
    Geno Says:

    z- they just successfully shut in one valve. I’ve lost the feed to the pressure guages. Anything happening?

  128. 128
    zman Says:

    RMD – at they are planning to get oilier, along with everyone else.

    Geno – cameras are position wrong at the moment to see gauges.

  129. 129
    zman Says:

    BP says no oil flowing into Gulf at present.

  130. 130
    zman Says:

    This is the start of the pop I was expecting, hopefully it gains momentum into the close.

  131. 131
    blackgold39 Says:


  132. 132
    zman Says:

    BG – I’d really like them to pan over to the gauges.

  133. 133
    zman Says:

    Fox about to talk about it, looks like they are first to mention.

    CNBC cutting into news now.

    Fair warning, my $40s will get punted over the side either today or in the morning.

  134. 134
    bill Says:

    brilliant trade on bp

  135. 135
    Geno Says:

    Z- my bet is the pressure guages are for their eyes only.

  136. 136
    zman Says:

    Thanks Bill, it’s nice when it works but recall I shed some skin in the name and in CAM and HAL on the trip lower too. No big head for me.

    Geno – afraid so.

  137. 137
    bill Says:

    38.56 what are those 40’s doing?

  138. 138
    zman Says:

    Oly Feed showing flat at 3,000 psi.

    No feeds on the inlet pressure.

  139. 139
    zman Says:

    Bill they are $0.44 bid

  140. 140
    bill Says:

    38.78 3,000 psi, whats that mean, shouldnt it be higher

  141. 141
    bill Says:

    from 7 cents to .44 wow

    i wish i had the guts to do it

  142. 142
    blackgold39 Says:

    37.50s are lagging on bid

  143. 143
    zman Says:

    Bill – that gauge is basically unchanged, it can’t be the one we want.

  144. 144
    bill Says:

    39.68 let em run!!

    id produce the well if i were bp

  145. 145
    tomdavis12 Says:

    Z: Rumor of a GS settlement also.

  146. 146
    zman Says:

    Order in to sell out 2/3 of ZCAT at $0.60 which was below the market but no confirm yet.

  147. 147
    Geno Says:

    Boa Deep C -ROV 1 means something

  148. 148
    john11 Says:

    SSN shares just showed up in my Fidelity acc’ts. Not yet in any others 16543shs.

  149. 149
    zman Says:

    Geno – I see a little seepage but at least it’s from a mechanical connection and not from the ground or the bottom of the BOP or from the connection between the BOP and the new stack.

    So far no confirm on my trade. I didn’t even get to put the same order in for the ZIM as the bids and asks on my trading system froze.

  150. 150
    zman Says:

    Thanks for that John. Schwab still showing full amount. It is supposed to happen this week according to the companies last comment so it should be today, tomorrow, but I would not be surprised to see that lag into next week.

  151. 151
    zman Says:

    Still no confirm, assuming they didn’t fill me. Here’s to a interesting day in the middle of a slow summer.


  152. 152
    RMD Says:

    128: getting oilier, more NGLs: so what? Everyone is doing it.

  153. 153
    zman Says:

    RMD – was thinking Niobrara oil.

  154. 154
    zman Says:

    GS reaches settlement with the SEC, good call Tom.

  155. 155
    AAA Says:

    I’ve been pretty critical of BP, but if they have managed to cap that sucker, I say congratulations to them and the brave crews on those boats and rigs. Let’s just hope it holds.

    The next question is why they didn’t do this weeks ago, as geno asked here at the time. I read a suggestion today that the government was afraid to put that much pressure on the well, so what changed, if anything, other than obama’s poll numbers?

  156. 156
    Geno Says:

    the best i can tell is there’s about 6000# on the pressure guage (hard to read) that with a full column of fluid probably gets them where they need to be as far as casing integrity and BHP.

  157. 157
    AAA Says:

    Geno, where are you seeing that?

  158. 158
    jat Says:

    Re 155, my understanding was that this most recent cap was custom designed by Cameron for the purpose and was larger than the previous, which weren’t working properly. That and the pressure fear.

  159. 159
    zman Says:

    Jat – this cap also has a hydraulic seal linking it to the half of the flange sticking out of the top of the BOP. I saw some goon on TV saying why didn’t they do this months ago and at the time of the first cap I recall writing something like “why don’t they undo those bolts and bolt a new BOP or cap to the top of the BP?”. The answer is that nothing is as easy on paper as 5,000 feet under the sea and the cap that would seal to that flange did not exist at the time. I bet this design will be perfected and then stored around the various drilling hot spots of the world. Good for CAM. And I still say that they should be blameless here since the design of the BOP did not call for it to function under the conditions which they found themselves in here. It simply could not have sheared, as it was not designed to shear, two pieces of drill pipe side by side.

  160. 160
    zman Says:

    I don’t see a view of the pressure gauge at the moment, anyone?

    The Boa C rovs are panning up and down the blow out preventer, looking for leaks, don’t see any so far.

    TEXW, Reef, Wyoming, Gino or anyone who knows what’s what with seismic, got any thoughts on Skanda Rov1’s feed? That’s the seismic survey the are doing to find subsurface leaks. I’m guessing no one can say for sure if those are bright spots?

  161. 161
    BirdsofpreyRcool Says:

    z — i’ve got a bit of a background in seismic… what’s the question?

  162. 162
    BirdsofpreyRcool Says:

    depending on the required penetration below the ocean floor, i would guess they are using SONAR technology… do you have the link to what you are talking about?

  163. 163
    zman Says:

    BOP – silly me to leave you out.

    Can you look at the BP live feeds? The Skandia 1 ROV feed is showing a sonar sweep, got to be sort of like 2D, no?


  164. 164
    zman Says:

    BOP had 163 in before I saw 162. Good call on the sonar.

  165. 165
    BirdsofpreyRcool Says:

    A sonar sweep makes complete sense. And — yes — a gas pocket or leak should show up as a bright spot as it would create an impedence contrast between denser ocean floor and less dense ocean-floor-with-gas-in-it.

  166. 166
    zman Says:

    BOP – Could bright spots coming and going indicate movement of hyrdrocarbons in the subsurface?

  167. 167
    BirdsofpreyRcool Says:

    I would think so. Anything that creates an impedence boundary (a boundary between something that is dense and something that is less dense) generates a seismic or sonar response. It doesn’t take a large presense of gas to show up as a “bright spot”… and gas naturally occurs just below the ocean floor. So, I would think they would be looking for a growing area of “bright spots,” if you will. And they would be using wide-scan sonar, so it’s not like 2-D seismic, but more dynamic.

  168. 168
    zman Says:

    I did not put in an order on the (100) $40 strikes in the ZIM due to a glitch at my broker.

    I did fill on the (40) $40 BP calls in the ZCAT for $0.60, up 207%. versus my average cost. Apologies that that didn’t go out during the market but it was a fast market trade that I found out just filled.

    So I’m still long a total of 120 of the July $40 strikes, 20 of the $38 Strikes and 10 of the August $37.50s.

  169. 169
    zman Says:

    Have you seen the feed yet BOP? It keeps coming and going as the sonar sweeps, but is not at the moment growing.

  170. 170
    scoop006 Says:

    Z #168 Would $41 tomorrow surprise you?

  171. 171
    BirdsofpreyRcool Says:

    You get a lot of “noise” in the first 20 ft of ocean floor… I’m guessing sonar is good for about 100 ft subsurface (but that is only a guess…. depends on a lot of stuff). And really, nat gas is not the worry here… but if it is indicative of where OIL is flowing into, THAT is the main worry, of course. I would think that not only are they trying to “see” subsurface, but they are keeping a gauge on the contour of the ocean floor. You don’t want to see it start to bow up… if you know what i mean.

  172. 172
    zman Says:

    Scoop. No. A lot depends on tonight of course. I wouldn’t be surprised to see a bump at the open even if everything is good followed by sharp profit taking (BTRSTN action) and then a rally into the close for Merger Monday potential. If all of that happens I plan to punt the July’s shortly after the open (first 30 minutes or so) and then consider the dip for more August call which I may kill Monday. My sense is that HAL is probably the better story on Monday but there may yet be a bit of juice left in BP. APC is safer with the well capped than BP.

  173. 173
    skimo Says:

    Looks like republicans want to see “what did you know and when did you know it” from the interior dept and could the spill impact have been mitigated. http://www.reuters.com/article/idUKN1521265220100715?rpc=44

    Z, congrats on BP 40 calls, nice profit for less than a day’s time.

  174. 174
    zman Says:

    Ski – saw that, what’s up with answering less than 20% of the requests? Sheesh, if BP did that they’d be in shackles.

    Thanks on the trade, a bit more gambly than I like to be but things are slow at the moment so it and coffee keep one plodding on.

  175. 175
    Geno Says:

    RE: pressure/ one of the camera’s had zoomed in on the bop stack. being that its deepwater high pressured stuff, I’m sure the guages are a minimun 10,000#. The guage was lock in at or around 6000#. I went back to some of the high def. pictures to varify the size guage, but just could not make out the numbers.

  176. 176
    zman Says:

    Geno – those gauges max at 10,000.

  177. 177
    Geno Says:

    Well 6000K it is

  178. 178
    blackgold39 Says:

    If there is another leak, it is much more likely to be in the wellhead/BOP/cap assembly than subsurface. That would imply rupturing multiple casing strings, and/or having multiple faulty cement jobs, including 2 or 3 that are probably circulated to surface

  179. 179
    zman Says:

    Lemme know if you see which camera that is occasionally on.

  180. 180
    zman Says:

    BG – thanks, makes sense.

  181. 181
    Geno Says:

    I think John Wright would have seen a leak, in the form of a show, on the way down with the kill well.

  182. 182
    Geno Says:

    Z – my computer keeps locking up, so i can’t tell you which camera. It’s the one that was focused on the bop stack with the 3 gauges stacked vertically. It’s the gauge in the middle.

  183. 183
    zman Says:

    Thanks Gino, mine too, their feeds like to lock up my browser. On the show, I would think that he wouldn’t have had one if the busted casing is relatively shallow as he was a bit aways in the beginning, but I see what you are getting at. No mention of any shows from their team, I think that would have gotten out.

    Watch for the movie quote Friday watch. First correct answer gets a Hellfighters DVD or a ZEB Mug, your choice. I’d take the movie though, it’s a classic.

  184. 184
    Geno Says:

    agreed, closing time!

  185. 185
    zman Says:

    Enterprise feed showing what looks like a rise connection, looks like they are going to hook it up to the siphon again.

  186. 186
    jy Says:

    BOP- Nice treatment of sonar as a shallow reading subsurface tool in #167.

    Suspect that BP is also using side scan sonar to detect any changes in seafloor topography in real time. Side scan can detect millimeter sized surface changes.

  187. 187
    BirdsofpreyRcool Says:

    jy — thanks!  I tried to say what you just said in #171… but you said it better (and i meant "side scan sonar"… not "wide scan sonar"… just a bit of a mind blip).

  188. 188
    BirdsofpreyRcool Says:

    I have no idea if tonight's BedTime Market Strategist will cut and paste in it's entirety (charts and all)… but, here goes… he has put out a major piece tonight and taken a bold stance
    Note: There will be an 8am conference call tomorrow morning to discuss this strategy update.  A handout  for the call will be posted at http://btigresearch.com tomorrow morning.  Dial-in number attached and below.
    On May 3rd, we switched to a Neutral stance on the premise that the initial recovery rally from the March 2009 low was complete.  The ISM Manufacturing crossed above the 60 threshold in April.  Our work illustrated that forward returns for the S&P 500 are at best average and often below average over the ensuing 1-2 years when the ISM moves above 60.  That included the majority of times when a recovery was sustained, as represented by solid ISM readings over the next 6 months.  We have always viewed our market stance in terms of risk versus opportunity, and in May we believed them to be balanced.
    Since then, a great deal has changed.  Most importantly, the S&P 500 has incurred a 17% peak to trough correction.  A series of headline risks served as the catalysts for the correction.  First, it started with the SEC charges against Goldman Sachs*, which in turn made it relatively easy for the Administration and the Democrats in Congress to advance Financial Reform legislation at a record pace.  That story was followed by the BP spill, although that remained under the radar for the first couple of weeks.  Then there was the combination of the “Flash Crash,” and the re-emergence of the Southern European Sovereign Debt crisis and the cascading of the Euro.  These developments fueled a behavioral reaction in markets where spreads blew out and Equities sold off, a reaction that we have labeled an “Echo Panic.”  With the parallels to 2008, market participants reacted quickly to ensure that they avoided the same outcomes of 2008.  The catalyst for the last leg of the selloff was a round of soft economic data.  To us, this is the catalyst that carries the most weight, but let us be clear that “soft” does not equate to a double dip recession, at least not at this juncture.  In our June 8th note, we highlighted what market developments would make us bullish again and a little over a month later, those things have all occurred.
    The Behavioral/Volatility aspect of the market was one that has been very dominant over the past 3 months.  Specifically, we wanted to see the Vix get back below 30 from the extreme levels it hit in May, but noted that other indicators could also help.  The Vix did get back below 30 and other indicators have helped out as well.  The risk associated with a market dominated by behavioral tendencies is that an investor’s greatest risk may not come from their own poor decision making, but rather from that of a competitor.  You can do all the due diligence in the world and find the greatest investment opportunity in the world, but if someone is being liquidated, you can count on that share price going lower.  For those of us who believe in reflexivity (the past two years have proven it far superior than efficient market theory), we also know that if price patterns are persistent long enough, they have the potential to exhibit real influence upon the underlying fundamentals. 
    We believe 2010 is the inverse of 2007.  In 2007, all the market saw was “opportunity” when in fact, the writing was on the wall early in the year that there would be problems later in the year.  Despite a rising interest rate environment, liquidity was plentiful.  Every S&P 500 company was a potential takeover candidate.  Simultaneously, mortgage originators were failing left and right in the first half of the year.  The Bear Stearns Credit Hedge Funds experienced problems in June.  Quant funds had problems in August, and several money funds, most notably BNP’s, were unable to access liquidity and halted redemptions.  The Asset Backed Commercial Paper market froze and has never been the same since.  Today it is 65% smaller.  Treasury announced a Super-SIV and the Fed started easing.  The market thought all would be OK and rallied to new, all-time highs in October.  The bear market bottomed last year and ever since then, wherever investors look, they see the “risk” side of the equation front and center.  “Opportunity” is something many are willing to miss out on these days. 
    Last week, we noted that we believe the washout for 2010 has occurred based upon the very pessimistic AAII sentiment reading of 26.8% (see table).  In a market that has had a boom-bust mentality for a decade, we have forgotten the short lived 20% corrections (that were brutal at the time) of the Asian Contagion and LTCM.  It is remarkable to think that LTCM, which was one of the greatest financial crises, is a mere footnote today because of two extreme bear markets registered in just under a decade.  We believe that this correction was of similar variety to those of the late 1990’s.  Since we have spoken at length about the AAII recently, we will not rehash it again except to say that it is an excellent indicator with an excellent history.
    Table 1

    Investors don’t want to make the mistakes of 2008 again, and as such, discipline has been the watchword.  Investors have hair triggers and are unrelenting when they decide they want to send the message to a region, a country, an industry or a company that they are dissatisfied with the state of affairs.  Since hedge funds are usually mandated to have some short exposure and are the fastest, most aggressive players, we have dubbed them Hedge Fund Vigilantes.  They are the financial policemen of the global economy and are willing to rough a suspect up in order to get a point across.  Although painful and volatile in the short term, this is very, very healthy in the long term.  Chart 1 below illustrates the size of hedge fund assets compared to those of mutual fund assets.  As you can see back in the late 1990’s, Hedge Fund Assets were less than 3% of the size of mutual fund assets.  Since 2005, they have bounced between 15% and 19%.  From our perspective, that is a good number of cops to have on the beat keeping markets disciplined.  We would venture to say it is unlikely that the U.S. equity market has ever experienced a recovery with such a diverse yet sizable active investor base of mandated two-way investors out there.  While it may create excess volatility in the short term, it keeps the markets healthy in the long term and brings problems to the forefront early, while they can be addressed.
    Chart 1

    Another large piece of the puzzle is mutual fund flows.  Domestic equity mutual funds have only experienced inflows 4 of the last 12 months.  A good portion of the rally occurred within that negative flow environment, and of course, some of the heaviest outflows occurred in May ($19 Billion) and June ($7 Billion).  Over the past year, Equity mutual funds have experienced $6 Billion in outflows.  Domestic Equity mutual funds have experienced $77 Billion in outflows, during the same time period, bond funds have experienced $396 Billion in inflows.  Investors’ penchant for bonds and avoidance of U.S. equities in an environment with a 3% yield on the 10 year Treasury is a prime example that investors remain too focused upon risk and are very willing to dismiss opportunity.  Charts 2 and 3 below illustrate Total Equity and Total Bond flows over the past decade.  We cannot help to point out the levels where equity flows peaked in 2000 as well as the bottoms the big outflows marked.  Simultaneously, the Bond flows data illustrates investors are defensively positioned despite the low yield environment.
    Chart 2

    Chart 3

    Anyone who reads this note is well aware that we were waiting for Initial Jobless Claims to register a new recovery low, which they did today.  One reading does not make a trend, but it is a step in the right direction.  Together with the severity of the correction the market endured in anticipation of a potential double dip, we deemed it worth taking the signal.  Today’s reading was influenced by the fact that there were fewer seasonal factory closings, no matter how you spin that, it is a positive.  This time last year, initial claims started dropping because of seasonal distortions as well.  In that case, the auto factory closings had already occurred due to the Chrysler and General Motors reorganizations.  That is a notable difference.  We recognize in May and June that data has softened, but it has not slid into contraction territory.  Considering the fears of the second coming of 2008, it is understandable that business managers may have acted somewhat more conservatively until signals emerge that the double dip is not imminent.  We believe earnings season will convey that message. 
    Chart 4

    Investors are well aware that the past two months of private sector job growth were weak.  What is often overlooked is that the two prior months were fairly strong.  Considering we had the snow storms early in the year, it is fair to look at the average monthly gain, which is 98,000.  We are adding jobs, albeit slowly.  Ever since this recession gained real downward momentum, investors were always well aware that this would be a jobless recovery.  While it is disappointing jobs are not materializing at a quicker pace, it is not a surprise.  Following the recent market correction, a slow jobs expectation has been re-priced into the stock market.  The true surprise at this point would be if initial jobless claims gained some downward momentum and some material hiring occurred.  Secondary indicators such as the difference between ISM’s New Orders and Inventories numbers and Average Weekly Hours for Production workers that track GDP well are still holding up. 
    Chart 5

    Chart 6

    Chart 7
    This is the big one.  We watched this market correction in awe at some points as we witnessed Equities trade lower even as the economy and earnings improve.  The S&P 500 is trading 13.4x the consensus estimate of $81.71 for this year.  Rather than use the lofty $94.71 estimate for 2011, we will be conservative and use the historic 6% growth rate for $86.61 for 2011.  At today’s close, the S&P 500 settled at 12.65 that estimate.  If you want to be additionally defensive and focus on the high quality companies of the S&P 100, you wind up with even more attractive multiples.  The long term historic average multiple is 16x.  Barring a major fall off in earnings, this market is inexpensive.  You can go one step further to note the nearly $2 Trillion of cash that corporations are hoarding.  The market capitalization of the S&P 500 is $9.9 Trillion, if you backed out the cash, that represents approximately 20% of that and you are looking at a market even cheaper than the multiples indicate.  The bear argument generally focuses on deflation pushing valuations and/or earnings lower.  Obviously, there is no way to rule out the chance of multiples compressing further, but the odds of returning to the historic average again are notably higher than that of a single digit P/E.  There is little doubt in our minds that there will be multiple expansion in the future while the probabilities of compression are low, especially considering the current interest rate environment in this country.
    That brings us to the Fed model and what it implies for relative valuation.  The premise behind the Fed model is that the earnings yield for the S&P 500 and the Yield on the 10 Year Treasury yields historically move together.  During the 1990’s, Equities generally traded more expensively than Treasuries, but for the past decade, it has been the opposite.  The yield premium or discount is the size of the spread between the two different yields.  As of today’s close, the earnings yield on the S&P 500 was 7.4%, and 10 year Treasuries yielded 3%.  Equities are trading at a 146% discount to Treasuries, implying that a combined equity rally/bond selloff adding up to that magnitude would be necessary to bring the relative valuation into equilibrium.  Obviously, this extreme disconnect is a representation of the large risk premium being priced into Equities as investors flock to the safety of Treasuries amidst the numerous fears in the market place.  As fears subside, bonds should sell off driving the Treasury yield higher and Equities should rally driving earnings yields lower. 
    Below we have constructed a chart of the Fed Model.  In an effort to be conservative and because we are going back to 1962, we are using trailing earnings which at $68.76 are notably lower than current year estimates.  At the pinnacle of deflation fears in the midst of the crisis in late 2008, the equity relative discount was 270%.  On July 2nd, it hit its most recent extreme of a 125% discount, a level not seen since April 2009.  Currently, the relative discount of Equities is approximately 108%.  The chart, which goes back 5 decades, illustrates how extreme this relative valuation is historically.  Also indicated by the red line on the chart is the 1 year forward returns that occurred from each reading.  As the chart shows, in most cases when Equities were inexpensive relative to bonds, the forward returns were pretty good.  Even for those who argue that “this time it is different,” we would note this as an example of a market that has already discounted a very weak environment as evidenced by the high risk premium.
    Chart 8

    We started the note discussing the Behavioral/Volatility risk associated with this market.  Again, in an effort to be conservative, we devised a metric to account for the outsized behavioral risk in the marketplace.  In the current environment the low Treasury yield partially represents a flight to quality bid because of market volatility.  In such a case, just because Treasuries are expensive, it does not necessarily mean that equities are cheap.  As such, the BTIG Fed Model with Risk Adjustment takes the value of the Volatility index, divides it by 10 and adds it to the 10 year Treasury yield.  In doing such, the rise in the Vix in times of stress will offset a large portion of the decline in Treasury yields during a flight to quality move.  The chart below illustrates that the relative discount of Equities is not nearly as juicy as the traditional Fed Model, but with that being said, it is still very attractive.  Considering the extreme discount achieved during the heart of the crisis was 88%, the current reading of a 61% relative discount appears very enticing since the world is in a much better place today (even though there are still challenges out there).  In short, on a risk-adjusted basis, this is a superior buying opportunity than the depths of the crisis.
    Chart 9

    In 2007, the market saw opportunity everywhere and failed to see the risk.  In 2010, the market sees risk everywhere and fails to see the opportunity.  What is unequivocal is that the large U.S. corporations that comprise the S&P 500 are the healthiest part of the U.S. economy.  They are healthier than the delevering consumer and the levering Government.  Despite that fact, fear continues to drive investors to bonds and to avoid the tremendous opportunity presented by Equities.  The equity market washout over the past couple months has strengthened our resolve that Equities have experienced another significant round of liquidation, again leaving people out of position for even a subpar recovery.  We can only imagine what would happen if jobs momentum increased.  The new low tick in the initial jobless claims is a step in the right direction. 
    For nearly a decade, we looked at an economy that continually over-levering acting greedily and irresponsibly and the market did not blink until it was too late.  Now, most of the bad actors have been put out of business.  The weaker competition has been eliminated.  Today, the top corporations in the world have trimmed all the fat and are flush with cash.  Will they use it for buybacks, acquisitions, dividends, hiring, cap-ex?  The answer is yes a combination of the above, they hold the cards and have the options.  Just as investors quickly exercise discipline to avoid the mistakes of 2008, so are companies, so soft patches are to be expected.  For those who are investing as opposed to speculating, this environment offers a tremendous opportunity.  This is the environment where buy and hold should prevail.  Likewise, speculators will have many opportunities, but it seems many are so focused on the short term that the long term gets lost.  We see potential for this market to rise above the 2010 highs to the 1250 level over the next 6-12 months.  If jobs can garner any momentum, it will be at the shorter end of that time horizon.

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    zman Says:

    Thanks BOP, sorry, charts won't come in in the comments section. Good stuff, still reading.

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    skimo Says:

    Z, shares are now in account as per allocation for SSN

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    zman Says:

    Thanks Ski. I see the same.

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    braces Before and After crowding Says:

    braces Before and After crowding

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