Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: December 2014

NEW$ & VIEW$ (3 DECEMBER 2014)

“Clearly A Negative Signal”: BofA Shows Thanksgiving Spending Was Biggest Dud Since Lehman

First it was Shoppertrak, then it was the National Retail Federation, then it was IBM, and now, with its own set of internal data, here is Bank of America slamming the door shut on US retail spending as a source of Q4 growth, and proving once and for all that the extended Thanksgiving-weekend, and the start to US holiday spending season, was the biggest dud since Lehman.

From BofA:

The BAC internal data showed a sluggish start to the holiday shopping season. Spending on BAC credit and debit cards over Thanksgiving and Black Friday declined 1.6% yoy. In order to restrict the sample to holiday-related spending, we are measuring “core control” sales, which nets out food services, gasoline, building materials and autos, making it a comparable sample to the Census Bureau’s data. While not as dismal as the 11% yoy decline reported by the National Retail Federation (NRF), our data supports the weak anecdotes.

(…) There are a few reasons to advise caution when interpreting Black Friday sales. For one, measuring sales over a two-day period is naturally noisy, but particularly since retailers adjust the promotion schedule over the years. (…) the promotions start earlier each year making the “door buster” deals of Black Friday less appealing. Moreover, the shift toward online shopping provides greater access to sales and incentives, also taking the focus away from Black Friday. The bottom line is that while we tempered our optimism, we still look for holiday sales to increase this year given the improving economic backdrop.

U.S. Light Vehicle Sales increase to 17.1 million annual rate in November

Based on a WardsAuto estimate, light vehicle sales were at a 17.08 million SAAR in November. That is up 5.5% from November 2013, and up 4.5% from the 16.35 million annual sales rate last month.


The shale slowdown: Oil’s price plunge hits U.S. production

(…) Raymond James Financial Inc., for example, expects WTI prices to stabilize at around $75 a barrel.

“At those levels, companies are going to reduce their capital expenditures,” Raymond James analyst Carlos Newall said Tuesday. “Production is not going to slow to a halt, but it is going to slow. You’ll see a reduction in rig count and then there will be a six- to nine-month lag when you’ll see a reduction in production.”

The three key U.S. shale oil fields are the Bakken in North Dakota and the Eagle Ford and Permian in Texas. Scotiabank economist Patricia Mohr has calculated that the average break-even price in the Bakken and Permian is $69 and $68, respectively, but with individual wells ranging from $54 to $82 a barrel.

But even if prices are above the break-even mark, companies will have to cut their drilling operations as their cash flow plummets from heady levels this year, and financing from banks and capital markets gets tighter.

Enerplus Corp., which pumped an average 22,400 b/d (including associated natural gas production) in the Bakken in the third quarter, expects to pare its 2015 budget by an unspecified amount from about $830-million (Canadian) this year. The Calgary-based company’s break-even costs are $50 (U.S.) in the best areas of the North Dakota play, and a portion of its overall production for next year is hedged at $93 oil, chief executive officer Ian Dundas said in a recent interview.

“We’re not planning on pushing our balance sheet,” he said. “Whatever our growth aspirations would have been in a $95 oil world, they are lower in a $70 oil world. There’s just less money to go around.”

To be sure, not all shale plays are created equal. Even within a zone, analysts say break-even economics can vary from one well to the next, depending on geology and other factors. Drilling in so-called “sweet spots” of the Bakken and the Eagle Ford in Texas, or the Cardium and Duvernay in Alberta, still makes sense even at much lower oil prices, said Callan McMahon, a senior analyst with energy consultancy Wood Mackenzie Group.

A sustained drop in oil prices threatens to weed out the weaker players, pressuring high-cost producers and setting the stage for production cuts and consolidation.

“The guys that had weak balance sheets at $100 oil are in trouble now and will probably not survive,” said Scott Saxberg, chief executive officer of Crescent Point Energy Corp., which pumps crude from the portion of the Bakken that spills over the Canadian border. He was speaking about the industry as a whole, rather than just shale oil producers.

Continental Resources Inc., which is among the largest producers in the Bakken, has already cut expenditures by $600-million and trimmed its forecast for production growth, although it can take up to nine months for lower prices to result in lower volumes at the well head. The company produced an average of 121,604 barrels of oil equivalent per day in the Bakken in the third quarter, up 29 per cent from the third quarter of 2013.

Like other U.S. independent producers active in tight oil plays, Continental has seen its share price pummelled, dropping by half to $39.70 from its August peak. The company said Tuesday it is monitoring the market to determine whether it needs to cut back further.

“We have said that if oil prices declined and stayed at a lower level for an appreciable period, we may adjust capex further and this would likely impact our expected 2015 production growth rate,” Continental vice-president Warren Henry said in an e-mail. “We can’t really be more specific than that since, in that scenario, drilling and completion costs will likely also decline and that would affect our decision.”

Don’t be fooled by all the analysis: the reality is that many wells have already stopped pumping uneconomic oil. The high costs producers have pulled the plug and the marginal guys are being told to do so by their banks. Production is already declining.

From Ed Yardeni:

One of our accounts noted that the seasonally adjusted production numbers show a decline of 0.4mbd over the past 10 weeks through the week of November 21 to 9.0mbd, while the unadjusted data continued to rise by 0.3mbd to 9.1mbd. The former suggest that the plunge in oil prices may be depressing production already, while the latter suggest that’s not so.

Eurozone Private-Sector Activity Slows More Than First Thought Activity in the eurozone’s private sector slowed more sharply than previously estimated in November, according to surveys of purchasing managers, making it likely the currency area’s economy will end a disappointing year on weak footing.

(…) Data firm Markit on Wednesday said its composite purchasing managers index—a measure of activity in the manufacturing and services sectors in the currency bloc—fell to 51.1 in November from 52.1 in October, reaching a 16-month low. That was lower than the preliminary estimate released late last month of 51.4.

Spain’s services sector slowed most sharply during the month, with its PMI falling to 52.7 from 55.9 in October. Spain’s manufacturing sector picked up during the month, but not enough to prevent the composite measure from falling to a nine-month low.

The revised figures recorded a steeper contraction in French activity, and the slowest expansion in German activity for 17 months. The only positive note was sounded in Italy, where private-sector activity rose at the fastest pace in four months.

Markit’s survey of 5,000 manufacturers and service providers also showed that a significant revival in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged.

Chris Williamson, chief economist at Markit, said the surveys show there is “a strong likelihood of the near-stagnation turning to renewed contraction in the New Year unless demand shows signs of reviving.”

In a separate release, the European Union’s official statistics agency said retail sales rose by 0.4% in October, having declined by 1.2% in September. But the rise in sales was largely confined to Germany, where unemployment is relatively low, and declines were recorded in France, Spain and a number of other eurozone members.

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Note: I am still travelling. Here’s the link to Markit Eurozone Composite PMI.

Euro Hits Two-Year Low The euro slipped to a two-year low with the latest dose of drab economic data bolstering expectations of further easing ahead of the ECB’s monthly meeting.
China’s Economy Shows Resilience

China’s official nonmanufacturing purchasing managers’ index rose to 53.9 in November from 53.8 in October, while the competing HSBC China services PMI rose to 53.0 from 52.9, according to data released Wednesday.

Link to HSBC China Services PMI

NEW$ & VIEW$ (2 DECEMBER 2014)

Draghi stands ready, without delay…

(…) Vitor Constâncio, Mr Draghi’s deputy, all but ruled out action in December. Last week he said policy makers wanted to wait until the first quarter of next year to judge the impact of existing measures, designed to swell the ECB’s balance sheet by up to €1tn, before acting again.

The view for policy makers is of a euro-zone populace so weary of years of economic turmoil that it’s increasingly electing politicians who say no to pan-European cooperation, and spurn reforms that the ECB says are vital to revive the economy. Trapped by their mandate to prevent deflation, officials fret they might soon be forced to roll out quantitative easing that can never succeed by itself.

India dashes business hopes for rates cut Central bank holds out prospect of easing ‘early next year’
Lower Gas Prices: How Big a Boost for the Economy?

(…) Prices of regular gasoline have fallen from $3.27 a gallon one year ago—and from a high of $3.68 in June—to around $2.77 on Monday, according to auto club AAA. That should provide a key boost at a time when growth abroad is faltering, even if lower prices curb investment in an expanding energy sector.

Consumers: Consumers spent $370 billion on gasoline last year. With prices expected to fall around 20% from their average during the first half of the year, the drop in gas prices over the past six months amounts to a $75 billion tax cut for consumers, according to an analysis by Kris Dawsey, an economist at Goldman Sachs.

Lower gas prices also benefit most businesses because it reduces shipping and production costs. Goldman estimates that the total boost from lower gas prices should boost growth domestic product by 0.4 percentage points over the coming year.

One open question is to what extent will households spend, rather than save, their unexpected windfall from lower gas prices. Goldman’s forecast assumes that around half of the windfall is spent over the coming year.

A drop in gas prices could be a particularly progressive tax cut because lower-income households are particularly sensitive to increases in energy prices. Households earning less than $50,000 annually spent around 21% of their after-tax income on energy in 2012, up from 12% in 2001, according to analysts at Bank of America Merrill Lynch. Households earning more than $50,000 spent 9% of their after-tax income on energy, up from 5% in 2001.

Energy producers: (…) Goldman sees an energy investment headwind of around 0.1 percentage points from current levels.

Taken together, that means lower oil prices should boost growth by around 0.2 to 0.3 percentage points. A separate model maintained by the Federal Reserve Board shows that a 25% drop in oil prices would boost GDP by a smaller amount, between 0.1 and 0.2 percentage points during the first half of next year, according to Goldman. (…)

The benefits to consumers also accrue over time as drivers fill up their tanks. So far, lower gas prices have saved the average household around $80, according to ClearView Energy Partners. If prices were to stay at their current levels for a year, the savings could rise to around $340 a household.

What about jobs? Don’t look for a big drag here. Goldman estimates that the main oil and gas production industries have added around 280,000 jobs over the last four years, or around 5,000 jobs per month. That’s a small share of total U.S. employment, since overall employers have added around 220,000 jobs per month over the past year.

High five THAT SAID, WEEKLY CHAIN STORE SALES REMAIN WEAK

The International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index fell 1.8% in the week ended Saturday from the previous week on a seasonally adjusted, comparable-store basis.

“Early Black Friday promotions the previous week contributed to the sequential week-to-week decline,” according to Michael Niemira, ICSC research consultant.

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In retailing, you’ve got be optimistic:

“Consumers actually reported being considerably behind on their shopping compared to the same week last year–which bodes well for December sales as consumers will play catch-up.”

Hmmm…

Punch Saudis risk playing with fire in shale-price showdown as crude crashes

(…) A deep slump in prices might equally heighten geostrategic turmoil across the broader Middle East and boomerang against the Gulf’s petro-sheikhdoms before it inflicts a knock-out blow on US rivals. (…)

US producers have locked in higher prices through derivatives contracts. Noble Energy and Devon Energy have both hedged over three-quarters of their output for 2015.

Pioneer Natural Resources said it has options through 2016 covering two- thirds of its likely production. “We can produce down to $50 a barrel,” said Harold Hamm, from Continental Resources. The International Energy Agency said most of North Dakota’s vast Bakken field “remains profitable at or below $42 per barrel. The break-even price in McKenzie County, the most productive county in the state, is only $28 per barrel.” (…)

Opec may not be worried about countries such as Nigeria, but even there a full-blown economic and political crisis could turn the north into a Jihadi stronghold under Boko Haram.

The growing Jihadi movements in the Maghreb – combining with events in Syria and Iraq – clearly pose a first-order security threat to the Saudi regime itself.

The Libyan city of Derna is already in the hands of the Salafist group Ansar al-Shariah and has pledged allegiance to Islamic State. Terrorist movements in the Egyptian Sinai have also rallied to the black and white flag of IS, prompting Egypt’s leader Abdel al-Sisi to call last week for a “general mobilisation” of all leading Arab and Western powers to defeat the spreading movement.

The new worry is Algeria as the Bouteflika regime goes into its final agonies. “They have an entrenched terrorist problem as we saw in the seizure of the Amenas gas refinery last year. These people are aligning themselves with Islamic State as part of the franchise,” said Mr Newton.

Algeria exports 1.5m bpd of petroleum products. Its gas exports matter more but the price of liquefied natural gas shipped to Europe is indirectly linked to oil over time.

It is an open question what will happen to Algeria, Iraq, and Libya if oil prices hover at half the budget break-even costs for a year or two, given the extreme fragility of the region and political risk of cutting subsidies.

The Sunni Salafist tornado sweeping across the Middle East – so strangely like the lightning expansion of Islam in the mid-7th century – is moving to its own inner rhythms. It is not a simple function of economic welfare, let alone oil prices.

Yet Saudi Arabia’s ruling dynasty tests fate if it is betting that the Middle East’s fraying political order can withstand a regional economic shock for another two years.

Contact: edgeandodds [at] gmail.com