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