HEROES AND VILLAINS

Russian leader Vladimir Putin came out swinging today--again, what's new?--blaming the West for much of the ruble's sickness.

Look Mr. Putin we get it. Like other global megalomaniac politicians who feel some secret calling that they can lead better than anyone else, it's a two way through fare. To keep his home support strong, Putin needs a villain.

What Putin apparently doesn't--or chooses not to-- understand is without villains there's no need for heroes. He needs the West as much as the West needs him.

Oil prices have been a big player here. Much of Russia's economy centers on energy. Couple falling energy prices with sanctions and  the standard of living for Russian people begins to stagnate. In some ways Putin is the Hugo Chavez of Russia.  But there's more than one way to buy the peoples' support.

Aggression in the name of protecting the motherland is another. In America it's labeled clear and present danger. But the people are never directly asked to help define those terms. And if you think rigged elections or those phony surveys MSM frequently float around are examples of directly asking the home folks, you have your head stuck somewhere the sun never shines.

Putin's bargain with his people, as Neil Buckley in today's Financial Times points out, "Pressure on Putin raises fears of increase in tension with west," higher oil prices permitted him to rule with the promise "...sacrifice some of your democratic freedoms, and we will deliver rising living standards." 

Now if anyone thinks that this is an unusual bargain, one that's not happening in the U.S. with the current administration, then one is not thinking.We need to continue spying on you to bring you safety, peace and prosperity.

It's also the basis of those EU countries like France, Italy and Greece who stubbornly resist making structural changes hiding behind the meme: Just let us slide this time and we promise we'll bring back economic growth and prosperity. And then we will get our acts together.

According to reports, inflation in Russia is approaching double digits. The ruble has fallen against the U.S. dollar lower than the belly of most fat ducks and falling with it are prospects for economic growth. Falling growth and rising inflation sound a lot like the ingredients of stagflation.

As we said, Putin needs the West as much as the West needs him. Every hero needs a villain. It's a symbiotic relationship of the first degree.

Let's make our position clear. Western sanctions over the Ukraine are a farce. The Ukraine is one of the poorest run governments in the history of governments. Other than propaganda what's there to save?

Lies are only lies when it's the other guy telling them.

Here's an excerpt of Putin's latest rage.

MOSCOW — Striking a defiant tone, Russian President Vladimir Putin on Thursday accused the West of provoking a crisis in Ukraine and using sanctions to try to constrain Russia.
In a speech to lawmakers and senior officials, Putin said Russia wouldn’t seek isolation or get involved in an arms race. But he lashed out at Western sanctions over Russia’s role in Ukraine, saying they were part of a plan to suppress Russia that would have been implemented with or without the crisis in Ukraine.

“No one will secure military superiority over Russia,” Putin said. “We have sufficient strength, will and courage for our defense.”
Putin’s speech in the Kremlin’s ornate St. George’s Hall indicated he has no intention of backing down in the face of Western sanctions which, along with low oil prices, have pushed Russia’s economy toward recession.

Turning to the Russian economy, which by one government assessment could contract next year, Putin said the government would take steps to liberate businesses from excessive regulation to stimulate the economy.

Putin said that Russia’s ruble USDRUB, +2.11%  which has fallen by around 40% against the U.S. dollar this year, has been subject to a “speculative attack” and called for the central bank and the government to adopt harsh measures to prevent further weakness.
An expanded version of this report appears on WSJ.com

THE TIP OF OUR NOSE

Let the price of oil rally a few days and the next thing you know those Wall Street minions are already calling a bottom.

If that surprises you, it shouldn't. Fickle is as fickle does. And it's pretty hard to beat the Street on two things--creating deals and fickleness. In a CNBC story today, "Wall Street starting to pick an oil bottom," this was noted.

Barclays became the first big Wall Street firm to upgrade a major oil stock in the wake of the crash in prices, a tentative sign that there may finally be some value in the energy patch following a slaughter in the sector's shares.

Barclays upgraded BP to "overweight" and called for the company to slash production and fire employees in order to get costs in line after oil's drop. The firm lowered its Brent crude oil estimate to $70 a barrel for 2015. That's about where it was trading Wednesday.

We wrote about energy in September, "More From The Oil Patch," "Straw Hats And Energy Prices" in October and many other times in 2014.  Fickle, in case you don't get it, is another way of saying short term.

Practically everything Wall Street does is short term. You're seeing a consolidation already in energy with the nearly $35 billion friendly Hailliburton-Baker Hughes deal. Buffett's footprint in energy is another example and there will be more.

Rumors floated just recently about Royal Dutch Shell might be considering taking a shot at BP. We own BP and other energy stocks, have been adding on weakness and we like the prospects for  many things that go out farther than the tip of our nose.

Here's the CNBC piece http://www.cnbc.com/id/102236082.

POWER AND SAFETY

We mentioned oil permits for new wells being down for all three major U.S oil fields yesterday, according to the latest report.

We have also written about the percentage of junk bonds tied to the U.S. fracking business hovering near 16% of the junk bond benchmark index, an unusually high number, up from only 7%
a few years back.
 
Many of these bonds are tied to smaller high cost producers dependent on high oil prices to bail them out and make a profit. Now that oil prices seemed to have gone south with the seasonal migrating birds, it's anyone's guess how many of these firms will be around should oil prices stay down or go lower.

Back in the dot.com days tech stocks made up 30% or more of the S&P 500. Check out what percent that sector occupies of the index today. Not a prediction, just a note even though we all know past is not always prologue.

For more on the hydrocarbon meme and what might happen, here's a good read from Marc to Market.

Oil Market Meets Minsky

During the Great Financial Crisis, Hyman Minsky, was rediscovered.  Minsky's insight was that long periods of steadily rising asset prices encourages financial engineering and leveraged bets that assume a continued rise in asset prices.  The so-called Minsky moment comes when the asset prices stop rising and even fall.  The virtuous cycle turns vicious. 

We are now all familiar with how that narrative played out in the housing markets in numerous countries.   The question we pose is whether similar forces are unfolding in the oil market.  

For the past several years, oil prices have averaged the highest on record, even though the 2008 peak near $150 has not been approached.  The high price of oil did two thing.  First, it helped create a mindset that was predisposed to believe we were at peak oil.  That new finds were rare and located in more difficult places to reach.  Second, it helped spur technological advances, and encouraged new production. 

The idea that oil prices were going to continue to trend higher for as far as the eye could see became extremely entrenched, and not just in the oil market.  This was the basis for both conservation and development of alternatives.    Some $90 bln of high yield debt was issued by US energy producers over the past three years.  This effectively doubled the energy sector's share of the high yield bond market.  The ability of borrow was predicated on the value of the oil in the ground.  In addition to the high yield bonds, many banks have provided leveraged loans to the shale producers.   

The leveraged aspect is not limited to the shale producers, but downstream and upstream concerns were also leveraged.  This includes the borrowing of money for railroad cars to ship the oil.  It include the chemicals and other supplies needed for the fracking. 

The precipitous decline in oil prices changes this dynamic.   Many observers seem to be repeating the judgmental mistakes made in late-2007 and early 2008, and not giving enough due to Minsky's insight.  The key is not so much the level of oil prices, but that fact that prices are not rising.  Rising prices was what justified the leverage and capital expenditures.   

The high yield shale sector energy bonds are likely held in by asset managers and hedge funds.  It would not be surprising if some pension funds, endowments and other funds had exposure through their alternative investment allocations, after all, like the housing market, Peak Oil was as story of a life time.  The high yielding energy bonds are off around 13% over the past 5-6 months.  The industry indices that track the sector are off about 2.5% excluding energy.      According to some reports that track fund flows, some $14.2 bln has left high yield funds this year after taking in around $72 bln over the past five years.  

The implication of these developments is that the days of cheap credit to energy sector broadly conceived is over.  This will curtail exploration and new development.  Capacity that has already been funded will come on stream in the coming months,  but new production will be slower coming on line. An industry report cited by Reuters found that permits for drilling new wells, which had doubled in the past year, fell 15% in the month of October (i.e. before the latest leg down in oil prices). 

This is a turning point in the industry.  The shale sector is fragmented.  Its debt acts as a high fixed cost.  These conditions will produce a behavior response similar to what we have seen in other industries when faced with a similar situation.  First, high fixed costs relative to variable costs provide incentives to initially produce even at a loss.  This only aggravates supply driving the decline in prices.  Second, as the high yield bonds and leverage loans become distressed, more provisions will have to be made by the banks, while fund managers will look to reduce exposures.  Third, there will be industry consolidation.  This appears to have already begun with the Halliburton-Baker Hughes tie up and Berkshire Hathaway's purchases in the fracking fluids and chemical space. 

The Peak oil story filtered through many other sectors outside of energy.  High costs for energy encouraged conservation, but as oil prices led to lower gasoline prices, this has changed.  In fact, SUVs and light truck sales helped fuel strong vehicle sales this year.  Data out yesterday indicated that November was the second month since 2006, that Americans bought more than 17 mln vehicles on a seasonally adjusted basis.  August was the other month. 

Last month luxury SUV sales soared.  Purchases of the Cadillac Escalade and the Lincoln Navigator increased by about 90%.  Incidentally, these models are both less energy efficient and higher profit margin (~$10k pre-tax profit per vehicle, according to industry analysts cited by news wires) than smaller vehicles).  

 

We mentioned before how big trucks like the popular Ford 150 were selling again and inventories on those fuel-efficient-green- climate savers were piling up on dealer lots. 

Two reasons and both have to do with human behavior: For dealers, bigger profit margins. And for all those soccer moms tooling around the country, power and safety.

When given a choice, power and safety trumps fuel efficiency every time.

OIL FIELD PERMITS DOWN

For every action they say there is a reaction.

Well, here's one given the recent sharp decline in oil prices that won't surprise some. Temporary or otherwise, according to the article, these declines included "the top three U.S. onshore oil fields." 

HOUSTON (Reuters) – Sinking oil prices caused a nearly 40 percent drop in the number of new well permits issued across the United States in November, pointing to a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info showed 4,520 permits for new oil and gas wells were approved in November, down 37 percent from 7,227 in October.

New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed for the first time this year steep declines across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota’s Bakken shale.

The Permian Basin in West Texas and New Mexico showed a 38 percent decline in new oil and gas well permits last month, while the Eagle Ford and Bakken permit counts fell 28 percent and 29 percent, respectively, the data showed.

The slides came in the same month U.S. crude oil futures fell 17 percent to $66.17 on Nov. 28 from $80.54 on Oct. 31. Prices are down about 40 percent since June.

OVERVALUED

The definition of overvalued is like many things in life, debatable. So here is a little teaser and some charts from http://thefelderreport.com to debate. 

Click on the link and see the others and enjoy yourself. It's a worthwhile read.

Overvalued: A glance at the chart below, of Warren Buffett’s favorite valuation metric (total market capitalization-to-GDP), clearly shows that there was also only one other time in history when stocks were priced so dearly as they are today: 1999.

HELOCS THRIVING AGAIN

Who isn't familiar with the saying: The more things change, the more they remain the same.

Well, if you aren't you probably haven't been doing your homework or you're not much a student of human behavior. And if you're making any pretense about being a good investor that's most likely to your detriment.

Homeowners are at it again, queuing up to the home equity ATM.  

According to a story today on CNBC, "Home equity is back and home owners are loving it," as home equity loans are once again thriving.

As home prices rise, homeowners are wasting no time making use of their new found, or regained, home equity. In fact, while all mortgage originations rose in the third quarter of this year, the biggest gain was in home equity lines of credit, so-called HELOCs. 

Originations of these loans, which are often in addition to primary mortgages, jumped more than 17 percent for the quarter, according to Inside Mortgage Finance, a mortgage industry publication. That came to $20 billion in new HELOCs, the highest amount for this year so far.

There's a couple of things wrong with this story, but more later about that.

At the current rate, lenders could originate more than $67 billion in HELOCs for all of 2014, which would be the most since 2009. Volume is still low by historical standards, but the gain points to not only more home equity available, but more confidence among consumers that they can tap their homes again for much-needed cash. There has, however, been a shift in the borrower mindset.

"It certainly seems like people are doing it a lot more responsibly now," said Rick Huard, senior vice president of consumer lending product management at TD Bank. "People seem to be much more educated customers." 

They have to be, because on the flip side, lenders aren't just handing out the loans to anyone with a pulse. During the last housing boom, borrowers extracted trillions of dollars worth of home equity, spending it on luxury goods and vacations, as lenders turned a blind eye to basic safeguards, like the ability to repay the loan or the borrower's other debt load.
Today, lenders are following more stringent guidelines enforced by federal regulators, and most HELOC borrowers are using the money to improve their homes, adding value to their largest asset, not subtracting it.

A survey of more than 1,000 HELOC borrowers by TD bank found many using HELOCs to consolidate other debt, thereby lowering interest rates (29 percent). Credit cards can carry interest rates more than four times that of a HELOC.
 
Others used the loans for automobiles (27 percent), emergencies (19 percent) or education expenses (20 percent). Some are refinancing HELOCs they already have.

Some of this may sound more responsible, but lenders are lowering their standards on home loans in general. It's a trend as housing is one of the big pushers in helping revive the economy and promote some growth.

The article goes on to say lenders are not just lending to anyone with a pulse. Yes, that might be true. They aren't now. But there's a feel good factor in here that more often than not leads to trouble.

And enticing revenue from these fees is another dubious element. It can become contagious to lender left on the sidelines.

Coupled with this story is an earlier one, "Big investors pull back  from housing," a fact that's been ongoing for a while and smaller firms and individuals are starting to fill the void.

With the boom in rents, investors looking for steady income are swallowing up some of these homes, but rents, like stocks and trees, can't grow the the sky.

http://www.cnbc.com/id/102213045

CHOOSE YOUR ECONOMIC FRIENDS CAREFULLY

If you suddenly had to hold one-fifth of your total assets in gold in five years, would that put you in a scramble?

Well, that's the scenario the Swiss National Bank faces "if the Alpine countries' voters on Sunday back a populist initiative the central bank vigorously opposes," according to today's Wall Street Journal.

There are several things to note here. First is the use of the term populist. Make no mistake even when used by the WSJ, it's a pejorative, something foolish or even worse. That the WSJ chooses to use the term is also instructive.

A paper that claims it supports free markets and strong  currencies, it remains still part of MSM and has to be read with a filter for propaganda no different from other MSN outlets. 

Called "Save Our Swiss Gold," the movement if passed would require the Swiss central bank to hold one-fifth of its assets in gold within five years and would  prohibit it from selling its gold or keeping any gold outside the country. That means it would have to repatriate the gold it has stored with other central banks.

This is an initiative that makes central bankers quiver in their sleep at nights and roll out the Prilosec during the days. Last year Germany's central bank created some news when it announced it was repatriating some of its gold stored in French and U.S. central banks.

The Dutch central bank recently joined the movement by saying it would bring gold stored in the U.S. home. Not so long ago central banks including Germany were unloading gold because it was not yielding anything. 

The Journal then trots out its requisite experts to comment on the initiative. 

"This is part of the allure of gold. frequently it has been an asset that reflected power and might," Joshua Aizenman, a professor at University of  Southern California. "  (But) "if you look at pure economic return on gold it's not a conservative asset." 

Then the Journal cites one of the scaremongers, a Swiss central banker, who attacks gold's recent volatility, saying it has cost the bank money because it had to mark down it balance sheet and  "forgo dividends for the first time in a century." 

The banker, SNB Chairman Thomas Jordan, concludes by calling the initiative "unnecessary and dangerous."

Interpretation: populist rabble have no idea what they are doing while central bankers do and printing endless streams of fiat money backed by zilch is stable and conservative as are paper assets purchased with that fiat money.

The  article then rolls out for its checkmate move former Fed Chairman Ben Bernanke. "A lot of people hold gold as an inflation hedge, but movements of gold don't predict inflation very well actually. Nobody really understand gold prices, and I don't pretend to understand them either."

So let's get this straight. Gold is too volatile, doesn't return anything, isn't a good predictor of inflation and nobody understands it, including Ben Bernanke.

"The strength of a gold standard is its greatest weakness," again quoting Bernanke. "Because the money supply is determined by the supply of gold,  it cannot be adjusted in response to changing economic conditions."

There you have it, the nightmare of every central banker, no more house painting. You can't inflate your way out of economic mistakes and debt by printing bogus money.  

It's called house painting of the first degree and central bankers, bureaucrats and politicians just love it.

The bad news is the Swiss initiative will probably fail. The good news more and more people are getting the true picture about central banking and central bankers.

They are hardly your economic friend.

VIENNA UPDATE

According to reports this morning from Associated Press, OPEC ministers meeting in Vienna have decided to keep oil output unchanged.

VIENNA —  OPEC oil ministers have decided to keep their present output target at 30 million barrels a day, despite an oversupply of crude and plunging prices.

The decision Thursday was expected. OPEC oil power Saudi Arabia had indicated before the meeting that it favors the status-quo.

As most followers of oil prices know the Saudis are the largest producers with the most latitude to cut or raise production.  Some members with less leeway pushed for cutting production, but many experts think the Saudis are willing to suffer lower prices to curtail shale production.

For more on the Vienna meeting check this link from The Fuel Fix.
http://fuelfix.com/blog/2014/11/27/oil-price-keeps-tumbling-on-belief-opec-wont-cut-output





    

MORE ON OPEC MEETING

Here's more on the OPEC meeting earlier this week in Vienna from Business Insider. The chart below showing the break even point for many of these producer countries lends some insight on the pain level each faces with further price declines.

Oil prices fell on Thursday ahead of a major meeting of OPEC members to decide on whether to cut production in the face of sharp price falls in the commodity over recent months.

Bloomberg

The latest falls are being attributed to growing doubts over the cartel's willingness to cut production after Saudi Arabia, OPEC's largest member, appeared to cool expectations on Wednesday. Saudi Oil Minister Ali al-Naimi said he expected the oil market "to stabilise itself eventually" strongly indicating that the kingdom may be willing to accept a longer period of lower oil prices in order to protect its market share against the US shale boom.

EIA

Oil prices have fallen by some 34% since June on the back of huge additional supply from the US shale boom as well as record output from Russia and surprisingly strong production in the troubled regions of Iraq and Libya.

However, a number of OPEC members are less sanguine about the recent falls. In particular Venezuela, Iraq and Iran have all called for production cuts to support prices as the falls hurt their fragile domestic economies. The Iraqi oil minister reportedly said on Thursday that there was a price floor at around $65-$70 a barrel.

Outside of OPEC Russia and Nigeria have also been agitating for a cut, with lower oil revenues taking their toll on national budgets. It's estimated that Russia needs oil to hold up at around $105 a barrel next year if it is to meet its current government spending commitments, while Nigeria and Venezuela require $122.7 and $117.5 respectively.

Deutsche Bank, Business Insider

A meeting between Saudi Arabia,  Venezuela and non-OPEC oil producers Russia and Mexico on Tuesday failed to result in any agreement to cut production levels. Venezuelan Foreign Minister Rafael Ramirez said that current prices were "not good" for producer countries, but that the only conclusion reached was for all sides to meet again in three months.

It now looks increasingly likely that those agitating for sharp cuts are going to have to accept more pain in the short term. However, for some more vulnerable countries further price falls even in the short term could be disastrous. 

WHEN IS STATUS QUO NO LONGER STATUS QUO

There's a new kid in town. Only thing is, he isn't really new. He known as active investors.

Active investors, like the companies and many of the products the companies offer, come in all sizes and shapes. Taking a meaningful stake in a company's stock, active investors show up often out of the blue.

Active investors seek change. And as we all know change seldom goes down easily. What kind of change? Strategic and financial for the most part, but often it about replacing either an incompetent or complacent management.

Bottom line, it's about money as in driving the stock price higher or being bribed, as it were, to just go away. As the Wall Street Journal, "Rising Clout Of Activists Investors Tests Chief Executives,"
in it's pre-holiday edition notes: activists calls for changes on company boards and even chief operating officers is on the rise again.

These forays peaked just ahead of the 2008 recession, falling for four years before starting to pick up in 2013 and move even higher so far this year. There an old saying still water runs deep. Underneath the pickup in activity is another sign many miss.

They are not just greedy big shakers and movers. The fact that these forays are growing in their success shows ".....their increasing support from shareholders, who have become more assertive in challenging CEOs since the financial crisis."

As the Journal points out, "So far this year, they scored at least a partial victory in 72% of campaigns for board seats, up from 57% in 2008."

Before one writes it all off as greedy shareholders hooking up with greedy activists, for openers for years too many companies have placed convenient firewalls to keep a lethargic management status quo status quo.

Such activity in recent years has affected companies form Darden Restaurants to Nexflix to Sotheby's to Yahoo, according to the WSJ. Though not all has led to management changes, activists frequently present shareholders with what is believed by both as a better plan for a target company's future.

This is not to say the sitting boards and CEOs take these invasions lying down. Poison pills on Wall Street and in corporate boardrooms are hardly new. These pills are an attempt to block large share purchases by activists.

What all this sets off usually is a costly struggle that can turn quite ugly as the spying from both camps increases. 

Like it or not, it's a message to corporate leaders not to get too comfortable with the status quo.