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

BEARNOBULL’S WEEKENDER

Did you miss this?  Facts & Trends: “Buy Low” Time For Oil

Related:

(… ) We’ve read a lot of silly articles since oil prices started falling about how U.S. shale plays can break-even at whatever the latest, lowest price of oil happens to be. Doesn’t anyone realize that the investment banks that do the research behind these articles have a vested interest in making people believe that the companies they’ve put billions of dollars into won’t go broke because prices have fallen? This is total propaganda.

We’ve done real work to determine the EUR (estimated ultimate recovery) of all the wells in the core of the Bakken Shale play, for example. It’s about 450,000 barrels of oil equivalent per well counting gas. When we take the costs and realized oil and gas prices that the companies involved provide to the Securities and Exchange Commission in their 10-Qs, we get a break-even WTI price of $80-85/barrel. Bakken economics are at least as good or better than the Eagle Ford and Permian so this is a fairly representative price range for break-even oil prices. (…)

Here’s a great article about a potentially disruptive company coming near you pretty soon:

Amazon Bought This Man’s Company. Now He’s Coming for Them

Jet.com is the brainchild of Marc Lore, the founder and former chief executive officer of Quidsi, a company best known for its most popular website, Diapers.com. He spent years competing with Amazon.com(AMZN) before getting clobbered in a price war and then, in 2010, selling out to the company for $550 million. Lore stayed on at Amazon for more than two years; now he’s preparing to assault it.

Refreshing Analyst

Nearly 40 years ago, a young sell-side analyst by the name of Maggie Gilliam began analysing retail stocks spending most of her time walking store floors, talking to sales clerks, watching shoppers and scanning store inventory. Her research reports read more like fashion analysis, marketing trends, store design creativity, etc.

For Maggie, knowledge is gained in the marketplace, not behind a desk doing sales, margins and earnings extrapolations. This diligence led her to be the first analyst to recognize certain new growth concepts early on and alert investors to companies like The Home Depot, Wal-Mart, Price Clubs (now Costco). I truly enjoyed her analysis and benefitted from her insights.

Leah Grace, sharing her views at Quiddity, has a similar hands-on, out-in-the-field, how-good-is-it-really kind of an approach to fashion and technology. That she is my daughter-in-law takes nothing away from her fashion and shopping savviness. Her analysis of fashion, retail and consumer technology are unique, honest, straightforward and refreshing. She also writes beautifully like in this post about Elon Musk and her recent ride in a Tesla.

Two of Leah’s recent posts:

The Calm Before the Storm Why Volatility Signals Stability, and 
Vice Versa (Nassim Nicholas Taleb and Gregory F. Treverton
)

(…) Although one cannot predict what events will befall a country, one can predict how events will affect a country. Some political systems can sustain an extraordinary amount of stress, while others fall apart at the onset of the slightest trouble. The good news is that it’s possible to tell which are which by relying on the theory of fragility. 


Simply put, fragility is aversion to disorder. Things that are fragile do not like variability, volatility, stress, chaos, and random events, which cause them to either gain little or suffer. A teacup, for example, will not benefit from any form of shock. It wants peace and predictability, something that is not possible in the long run, which is why time is an enemy to the fragile. What’s more, things that are fragile respond to shock in a nonlinear fashion. With humans, for example, the harm from a ten-foot fall in no way equals ten times as much harm as from a one-foot fall. In political and economic terms, a $30 drop in the price of a barrel of oil is much more than twice as harmful to Saudi Arabia as a $15 drop.


For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks. Applying these criteria, the world map looks a lot different. Disorderly regimes come out as safer bets than commonly thought—and seemingly placid states turn out to be ticking time bombs. 
 (…)

True Luck “Coupled”

Further to my Jan. 2nd post, some stats on life expectancy and the power of the couple.

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NEW$ & VIEW$ (9 JAN. 2015): Credit Stories

U.S. Consumer Credit Usage Continues Moderately

Consumer credit outstanding increased $14.1 billion during November following an upwardly revised $16.0 billion October rise, initially reported as $13.2 billion.  During the last ten years, there has been a 54% correlation between the y/y growth in consumer credit and the y/y growth in personal consumption expenditures.

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BTW: FHA will reduce annual mortgage insurance premiums by 0.5%, giving the “typical” first time homebuyer a $900 cut in yearly mortgage payment. This is roughly the
same as a -50bp cut in mortgage rates. (ISI)

Car Loans See Rise In Missed Payments Borrowers who took out auto loans over the past year are missing payments at the highest level since the recession, fueling concerns among regulators, analysts and some in the car industry that practices that helped boost 2014 light-vehicle sales to a near-decade high could backfire.

“It’s clear that credit quality is eroding now, and pretty quickly,” said Mark Zandi, chief economist at Moody’s Analytics.

More than 2.6% of car-loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008, when such delinquencies rose above 3%, according to an analysis of data performed for The Wall Street Journal by Moody’s Analytics.

The uptick comes amid an increase in subprime auto loans, raising concerns that car buyers may have taken on more debt than they can handle. For that set of borrowers, defined as consumers with a credit score lower than 620, loan performance also is deteriorating.

More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November, according to the Moody’s analysis of Equifax credit-reporting data. That was the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%. (…)

The rise in delinquency rates shouldn’t be surprising given the rebound in subprime lending, said Melinda Zabritski, director of automotive credit for Experian. Lending to below-prime borrowers accounted for about 23% of the vehicle-finance market in the third quarter, up from 21% in 2009 but still below pre-recession levels of 28% in 2007, according to Experian. (…)

These borrowers are direct beneficiaries of lower oil prices.

Eurozone Industrial Output Falters

Official data released Friday showed industrial output in Germany fell on the month in November by 0.1%, bucking expectations for a 0.4% rise in a Wall Street Journal survey of analysts. Germany’s trade surplus also narrowed more than expected as exports declined and imports increased.

October’s output rose a revised 0.6%.Energy output declined 2.4 percent in November from the previous month and construction fell 0.6 percent, today’s data show. Manufacturing rose 0.3 percent, driven by gains in output of investment and consumer goods.

French data also disappointed. There, industrial output fell unexpectedly in November, declining 0.3% on the month from October. Analysts polled by the Journal had predicted an increase of 0.2%.

In Spain, the news was also negative. Industrial production declined by 0.1% on the month.

ECB Said to Study Bond-Purchases Up to 500 Billion Euros
China Inflation Inches Higher China’s consumer inflation ticked up slightly in December, but a further slide in factory prices raised new concerns over weak demand in the world’s second-largest economy.

The consumer-price index gained 1.5% year-over-year in December compared with a 1.4% increase in November, the National bureau of Statistics said on Friday. The uptick in prices largely reflected a slightly faster pace in food-price increases, with the consumer-price index rising 2% for all of 2014—well below the government’s 3.5% target and representing its smallest increase in five years.

In December, the producer-price index, which measures prices at the factory gate, slipped 3.3% from a year ago for its 34th month in a row of declines, with the fall accelerating from the 2.7% drop in November. For 2014 as a whole, the producer-price index fell 1.9%. Excess capacity, particularly in heavy industry, has been blamed for much of the drop.

Looking at monthly trends, deflation is not a concern in China at this time.

CHINA CREDIT SHOWS UNSEASONAL RISE IN DECEMBER

China’s banks usually lend less in December because of low year-end demand. At the end of 2014, though, banks may have broken the seasonal pattern, extending nearly double the amount of new loans compared with the same period in 2013. The main reason is the PBOC’s lending rate cut in November. (BloombergBriefs)

China LDR Change Paves Way For Bank Loan Expansion

The decision by the People’s Bank of China to relax the rules for calculating bank loan-to-deposit (LTD) ratios in 2015 will facilitate increased bank lending, says Fitch Ratings. If this leads to another round of monetary stimulus and loosening of credit conditions, it would reaffirm Fitch’s concern about Chinese bank asset quality and the risks from a fresh round of rapid credit expansion.

The rule change by China’s central bank, as stipulated in a document recently reported by local and international media, broadens the definition for deposits when calculating the LTD ratio. Notably, these include interbank deposits from non-deposit taking financial institutions and placements relating to securities and trading settlement. Initially, the reserve requirement ratio for these newly defined deposits will be set at zero.

These changes would reduce the existing ratio by up to five percentage points, according to market estimates, enabling banks to boost credit by up to CNY5.5trn-6.0trn This would go a long way toward supporting Fitch’s forecast that by year-end, total adjusted credit will hit 260% of GDP, thereby extending an unprecedented rapid rise in system leverage. (…)

The ratio calculation had previously been relaxed earlier in 2014 by the China Banking Regulatory Commission to spur lending to small and micro enterprises (MSEs), and the latest move follows a lending rate cut in November. As such, Fitch maintains its view that this could prompt banks to revert to a volume-driven, expansionary stance. This is especially so as the government has been focused on targeting increased lending to the potentially higher risk MSE sector.

It is important to note, though, that the change in the LTD ratio calculation could also lead to more off-balance sheet lending moving back on to bank balance sheets. Increasing the disclosure of shadow bank lending on the balance sheet would improve transparency – something that has scope for considerable improvement, and continues to weigh negatively on bank ratings. By recognising these exposures as loans, banks would also have to increase provisioning against non-performing assets.

Brazil December Inflation Accelerates Most in Nine Months Brazil’s inflation accelerated to the fastest rate in nine months in December as the central bank raises rates in the face of flagging growth.

Monthly inflation as measured by the benchmark IPCA index accelerated to 0.78 percent from 0.51 percent in November, the national statistics agency said today in Rio de Janeiro. That matched a median estimate for a 0.78 percent rise from 42 economists surveyed by Bloomberg. Annual inflation slowed to 6.41 percent from 6.56 percent a month earlier, dropping within the target range.

How OPEC Weaponized the Price of Oil Against U.S. Drillers

(…) The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.

The four Middle East OPEC members are counting on combined reserve assets estimated by the International Monetary Fund at $826.4 billion to withstand the plunge in prices. Petroleum represents 63 percent of their exports. At least 10 calls and several e-mails to the oil ministries of all four countries on Jan. 7 and yesterday weren’t answered.

The price decline will cost all 12 OPEC members a total of $257 billion in lost revenue this year, according to the EIA. Venezuela has a 93 percent chance of defaulting on its debt over the next five years, according to CMA, a data provider owned by McGraw Hill Financial Inc. (…)

Mexico Cuts 10,000 Oil Service Jobs as Pemex Funds Fall

More than 10,000 people working at Mexican oil service companies were laid off this week as state-owned Petroleos Mexicanos cut contracts in the face of the global slump in crude prices. More job losses are expected.

Most of the companies are based in Ciudad del Carmen, on the Campeche Bay in theGulf of Mexico, and were told this week that contracts wouldn’t be renewed with Pemex, as the world’s ninth largest oil producer is known. Job losses could rise to 50,000, Gonzalo Hernandez, secretary at the Ciudad del Carmen Economic Development Chamber, said in a phone interview.