UNDISPUTED

 

A lot of people are eating fresh crow this morning, including three guys named May, Palmer and Pollock.

No, they're not members of some prestigious legal firm, just three media ex-jocks who know a lot less than they think they do. 

They said Ohio State was untested and undeserving. But all Ohio State did was defeat the number one and number two teams back to back.

Congratulations to The Ohio State University, their coaches, players and fans, college football Undisputed National Champions 2015.

Enjoy your breakfast, gentlemen. Enjoy your breakfast.

AND THEY MIGHT NOT LIKE IT

Be careful what  you wish for goes an old saying.

Sure consumers are suppose to be rejoicing as gasoline prices at the pump drop. But much of that may soon be offset by higher gasoline taxes. It's been a few years since those sophisticated bureaucrats have tacked on more of those little goodies.

What apparently many don't seem to understand is falling energy prices and a dollar on steroids are both double-edged blades. Falling energy and rising dollar prices are quite different from stables ones.

Part of the dollar strength is coming from the beggar-thy-neighbor policy central banks in Japan, the EU and elsewhere are playing which brings up another issue. Is the U.S. economy really that good or is much of its rise owing the how weak other economies around the globe are?

The answer to that is what many investors may yet have to discover. And they might like it once they do.

Here's a story about possible state budget shortfalls owing to the declining energy prices. There will be others and they won't all be in those oil producing ones.

AUSTIN — State Comptroller Glenn Hegar, predicting a moderate economic expansion, said Monday that lawmakers will have $113 billion in state revenue available for general-purpose spending in the next budget cycle.
The total includes $7.5 billion that will be left unspent when the current budget cycle ends on Aug. 31. It also accounts for $5 billion in general-revenue transfers to the rainy day fund and the state highway fund.
Hegar said his estimate expects "moderate expansion" in the Texas economy while reflecting uncertainties in oil prices.
"Texas remains a leader on the national economic stage, and while we anticipate the robust pattern of growth the state has seen in recent years to moderate, we do expect continued expansion of the overall economy," Hegar said in a statement.
Hegar's estimate has been closely watched because of dropping oil prices. It sets the parameters for spending decisions by state leaders and lawmakers.
His revenue estimate projects an 8.9 percent increase in state sales tax revenues and a 14.3 percent drop in oil production and regulation taxes.
In addition to incoming revenue, the state's rainy day fund will have an $8.5 billion balance at the end of the current budget cycle.
State revenue from all sources, including federal money, is estimated at $220.9 billion in the next two-year budget period.

A COILED SPRING WILL UNCOIL ITSELF

As an investor one must be disturbed by central bankers everywhere and their fascination with a 2% inflation target.

It's almost reached point of becoming the assured panacea of Central Banking Gods, the answer to all of the globe's myriad economic ills.

One of the first things any good medical diagnostician learns is, never make your diagnosis in the lab or base it on a lab result.

Just to take one example, mammograms, like it or not, they're a metaphor for labs. Yet data show 50% fail to detect smaller cancers. The list of false positives in lab work, blood, urine or otherwise, is long. If you can have false positives, you must have false negatives.

Yet central bankers--the so-called  diagnosticians for monetary policy and economic growth--continue to worship at the alter of preconceived numbers. This seems to be about as fixed as fixed-views get, a view that could prove quite dangerous. Inflexible might be a more accurate term.

Most of the Fed folks are noted for their economic gobbledygook and their mind-numbing reports written in an even more mind-numbing style. Much of it wouldn't earn a solid C in a college freshman basic English class.  

And this leaves out all those econometric model abortions the profession so reveres. 

So one hardly expects them to be versed in the classics like Sophocles' Antigone:

The inflexible heart breaks first, the toughest iron cracks first, and the wildest horses bend their necks at the pull of the smallest curb. 

Point being: We might all be better off--including the economy--if these folks spent less time soaking in the bathtub with their rubber ducks pouring over figures and a bit more reading estimable stuff like the classics. 

A coiled spring will uncoil itself, absent time and interference.

WHO KNOWS?

More from the oil patch.

Looking for a bottom in crude prices has become almost as popular of late as fantasy football. How popular is that? Well, here's a link about a guy who spent nearly 300 hours in 2014 playing the game.

And he came in second, winning the huge sum of $30.

http://www.theonion.com/articles/man-who-spent-300-hours-playing-fantasy-football-t,37707/

To be sure, nobody knows for sure where the bottom is. Or for that matter when it will occur. We've seen projections for $20 a barrel on the low side and others in between the recent breach below $50 a barrel. 

Here's the opinion of a well known energy trader that's worth considering in the jumble of those out there. Given the speculation it is one of those anyone can be wrong and anyone can be correct.

But if past is prologue, when it's all said and finished, a whole bunch of them will claim the prize that they called it.

Renowned Trader Hall Sees $40 Oil ‘Absolute Price Floor’

By Bradley Olson and Simone Foxman - Jan 7, 2015

Oil prices have almost bottomed out and “some recovery” is likely by the second half of the year as demand picks up, commodity hedge fund manager Andrew J. Hall told investors.

Crude could trade in the $40-a-barrel range in 2015, close to “an absolute price floor,” the head of Astenbeck Capital Management wrote in a Jan. 2 letter obtained by Bloomberg News. A significant amount of U.S. and Canadian production can’t cover the cash costs of operating at that price, he said.

“Oil prices will stay under pressure in 2015,” he wrote. “However, current prices are not sustainable in the longer term. The interplay between extreme weakness in the short term and the potential for supply shortfalls in the medium term should create attractive trading opportunities over the course of the coming 12 months.”

Hall gained notoriety in 2009 after receiving a pay package of about $100 million while at Citigroup Inc., a bank that received government assistance during the financial crisis. For more than two decades he led Phibro LLC, which Occidental Petroleum Corp. (OXY) bought from Citigroup. Founded in 2010, Astenbeck manages a total of $3 billion.

Phibro is in the process of being sold by Occidental and Astenbeck is now operating independently, according to two people familiar who asked not to be identified because the matter is private. Spokeswomen for Occidental and Astenbeck declined to comment.

Plunging Prices

West Texas Intermediate oil, the U.S. benchmark, fell below $50 a barrel this week for the first time in more than five years. WTI rose 1 percent to $49.11 at 1:21 p.m. today in Sydney. Prices fell 46 percent last year, as flagging demand forecasts met expanded output from North American shale formations.

A futures contract for April delivery is selling for $49.78. Delivery in December is $55.12 a barrel, according to data compiled by Bloomberg.

Saudi Arabia and its allies are seeking to drive high-cost producers from the market, Hall said. While many have assumed this is U.S. shale drillers, the majority can operate at lower prices, he wrote. The most vulnerable operate in Canada’s oil sands and deep-water production, said Hall.

Cuts in spending this year will set the stage for an eventual supply shortfall, said Hall, who has long held that oil will become more expensive. Once prices begin a sustained increase, companies won’t be able to count on as much new crude from projects. The low prices also increase the risk of geopolitical instability, another factor that could boost oil if a major producer is unable to make exports, Hall said.

THE OIL BACKDOOR

Here's a theme we've been mentioning for a while now. We like to call it the unseen.

As adroitly put in this article from Platt, "while volatility slips in through the back door."

The recent auto sales reports tells you much about humans. Sales were up and so were profits as buyers, given the fall in gasoline prices, shunned the economical for big trucks and SUVs. The backlog of more climate-friendly wheels are clogging car lots like they're a bunch 80 year old coronary arteries. 

New vehicles usually come attached to three or five year notes. Where will the price of petrol be in three or five years, who knows?  When gas filed tanks at $4 a gallon, how easy was it to unload those huge clunkers. About as easy as it is now for dealers to unload all those lower profit margin gas savers nobody--at least at the moment--basically wants.

One could talk short-sighted here, but no-sighted might be more accurate. Even more appropriate is people are people. To think otherwise is to take your eye off that back door.

http://blogs.platts.com/2015/01/08/oil-future-problems/

FORGET THE BISCUITS, PASS THE B&B

There's much blithering and blathering going on since the European Union's year-on-year prices recently came in negative 0.2% for December.

Those in favor of oiling up the old printing press whiffed an opportunity only these folks can never fail to pass up. Prices are not the only things falling. If one listens to this crowd, so is the sky.

The Dragster himself, ECB leader Mario Draghi, worried out loud that such a decline might set off a wait-and-see-about-prices-until-tomorrow tantrum by consumers, thus causing further deflation in prices.

For those who care to beg the difference, here's a different point of view from: http://davidstockmanscontracorner.com/the-deflation-calamity-howlers-are-dead-wrong-in

So right on schedule comes this blithering nonsense from one James Ashley, purportedly an economist at RBS Capital Markets:

“The emergence of negative inflation does forcefully raise the specter of a possible prolonged period of deflation,” said James Ashley, an economist at RBC Capital Markets. “In other words, for those policy makers who, hitherto, might have been undecided over whether or not to take further action immediately, this may be just the clarion call that was required to appreciate the gravity of the situation.”

That’s right. A single month of hairline negative inflation is a “clarion call” no less—calling for the ECB to damn the monetary torpedoes. Could it be the RBC has been busy putting its clients and its own prop funds in Italian, Spanish, Portuguese and Greek bonds on the predicate that a big fat Italian bid would be forthcoming from the ECB?

In short, the euro zone’s momentary spat of year-over-year price stability is almost entirely owing to the global decline of commodities since the China bubble driven peaks of 2012; and also the lagged effect of the Euro’s strength prior to mid-2014.

In the case of non-food commodities including energy, for example, the producer price index is down about 25% from it 2011/12 peak.  Since the euro zone imports a heavy share of its energy and industrial commodities, isn’t this decline a welcome development?

And there’s more. Commodity prices are still double their pre-2005 level. In other words, the giant global commodity bubble generated by the runaway credit boom in China, the BRICs and their EM satellites has finally started to cool, and this relief is now washing through the euro zone price indices. Rather than an existential crisis, the cooling of euro zone inflation is mainly a welcome surcease from the utterly aberrational credit bubble that was foisted on the global economy by central banks over the past decade.

GRADUALLY, THEN SUDDENLY

Here's a story we like. It's about maximum pessimism.

The gloomier it gets the more we like it. These for the most part are all good dividend paying companies with the exception of QEP. 

We know that mid-term these days let alone long-term is an unwelcome theme on the Street.

QEP's trip to the equity woodshed is based on the expectation that natural gas prices will follow crude oil over the cliff and into the abyss. We welcome the idea.

In Hemingway's "The Sun Also Rises," one of the characters is asked how he went bankrupt to which he replies: "Two ways. Gradually, then suddenly."

Truth be told that's the path to wealth. It takes time and a wide margin for error. The lower these stocks get the less margin for risk is needed. They are undervalued and misunderstood. The cure for low prices of a commodity is low prices.

Forget the falling knife meme. Coupled with the dividends, a simple regression to the mean will return serious money over either of those most unwelcome Wall Street time frames.

A stock that should be on the list below is Helmerich Payne (HP), the Tulsa-based big oil rig firm. As sector prices decline like this consolidation usually kicks in and the strong get stronger at the expense of the marginally weaker.

Exclusive: Sell-side sours on U.S. energy stocks more than any sector

11:57am EST

By Rodrigo Campos

NEW YORK (Reuters) - As if plummeting oil prices were not giving energy companies enough to worry about in 2015, Wall Street has turned against the sector, with stock analysts slashing earnings estimates.

Despite a 23 percent drop in the S&P 1500 energy sector .SPCOME since the end of June 2014, stock prices still may not account for the drastically lowered forecasts for the sector's earnings, particularly if oil prices continue to slide.

Of the 10 S&P 1500 .SPSUP sectors, Thomson Reuters StarMine data ranks energy as having the worst analyst sentiment, using a model that lists equities by aggregating metrics that include changes in estimates for company earnings-per-share and revenue.

On Tuesday, energy was dead last, with its components averaging a ranking of 14 out of 100, down sharply from 26 a day earlier. One component, Chevron Corp (CVX.N: Quote, Profile, Research, Stock Buzz), the No. 2 U.S. energy company, had a 1 in the Analyst Revision Score, meaning analysts have been more furiously lowering estimates for Chevron than for 99 percent of companies.

EPS estimates for Chevron's fourth quarter have dropped dramatically in the last month. Six different analysts have lowered earnings expectations by an average of 14.3 percent in that time, during which the stock price has actually risen by about 1 percent.

Six of the largest 10 energy companies, accounting for 33 percent of the sector's market capitalization, have a ranking of 9 or less in StarMine's Analyst Revision Score.

The outlook has continued to worsen as crude futures prices kept sliding to new 5-1/2 year lows. U.S. crude oil recently fell below $50 a barrel after trading above $100 for the most part between February and July of last year. [O/R]

"We believe it is more likely that oil goes to $20 before it goes to $80, and we think that oil prices are likely to remain low for a long time," Brian Reynolds, chief market strategist at Rosenblatt Securities in New York, wrote on Tuesday.

Marathon Oil (MRO.N: Quote, Profile, Research, Stock Buzz), Hollyfrontier (HFC.N: Quote, Profile, Research, Stock Buzz) and QEP Resources (QEP.N: Quote, Profile,Research, Stock Buzz) are among the other handful of energy companies with a 1 Analyst Revision Score.

On Tuesday, Bank of America/Merrill Lynch cut its rating on Chesapeake Energy (CHK.N: Quote, Profile, Research, Stock Buzz) and Laredo Petroleum (LPI.N: Quote, Profile,Research, Stock Buzz) to "underperform" and EOG Resources (EOG.N: Quote, Profile, Research, Stock Buzz), the seventh-largest energy company on the S&P 1500, was downgraded to neutral.

Expected earnings growth for the S&P 500 energy sector's .SPNY in the fourth quarter was at -19.8 percent, according to Thomson Reuters IBES data, down from a 6.4 percent growth expectation on October 1. The first quarter looks even worse - an expected decline of 32.2 percent..

GOOSE AND GANDER TIME?

We've talked before about the importance of looking for the unseen.

Nearly everyone by now realizes the initial benefits and the obvious beneficiaries of lower oil prices. If utilities companies are capital intensive, and they are, the early beneficiaries of softer energy prices are for the most part the energy intensive.

You know the usual suspects, transportation firms, retailers and restaurants, the drive to work crowd, to mention a few. But at some point, often a bit farther down the road, low prices carry the prospect of whacking the economy with a bigger hurt than many suspect.

It's kind of a reverse law in itself of what's good for the goose ain't always good for the gander.

With crude yesterday falling for the first time in over five years below $50 a barrel, fear about global growth grow.  Couple that with other troubles like the Greece situation and a U.S. dollars that seems to have recently discovered steroids, visions of deflation and slow growth have replaced those of any sugar plums that might arrive via cheap gasoline prices.

And that's what more than one well known investor is talking about in this piece recently on Zero Hedge.

http://www.zerohedge.com/news/2015-01-05/jeff-gundlach-if-oil-drops-40-geopolitical-consequences-could-be-terrifying

DAILY MEDIA HYPE

Part of the fun and education of prowling around the Internet is discovering others who share your own experiences about what we call the media-market complex.

Like we keep repeating be your own person, accept the responsibility that comes with it and, by all means, do your homework.

This is from Daily Speculations.

The Financial Media, from Jeff Watson

January 5, 2015 | Leave a Comment

Media advice is of little worth, except for a fade perhaps. After all, the primary purpose of the typical financial reporter is to make his/her quota in inches. Quantity over quality. The purpose of the financial media is to sell ads, make money, and hook you like a fly fisherman casting a fly at a trout. The TV financial media has been taken over by guest experts(touts). I avoid reading or listening to them like the plague as I prefer to make my decisions looking through my own lens, not the lens of others(who are observers, not players), second hand.
This broken down old grain trader looks at the financial media with a very flinty eye, much like one looks at the guys at the track who sell tout sheets when you walk past the turnstyle. Make your own decisions, keep your own counsel, and play your own hand. If you need advice, there are private subscription services, for a high price, that might, sometimes be worth listening to, but unless they have skin in the game avoid them like the plague.

Craig Mee writes: 

Everyone is now a salesman trying to justify themselves…listener beware. Funny how the country boys seem to do less talking and more listening and see things more clearly. I suppose that happens when you're not selling your soul on every deal as a means to pay the rent.

IT'S THAT TIME AGAIN

It's that time again, although you usually see articles like this throughout the year.

It's time to lay down some thoughts about 2015 and how to increase your chances to be successful in the land of investments where most often it takes two eyes rather than one to remove the veil.

Here's our list.

1.  Do your homework.

2.  Look for the unseen, not the seen.

3.  Related to #2, understand what everyone knows is usually not much help at best and incorrect at worst. Former President Dwight Eisenhower once noted: "If everyone is thinking the same thing, nobody is thinking."

4.  In boxing it's the one you don't see that does the damage or hurts the most. In case you don't recognize it, that's a metaphor for asking yourself what have I not looked for or not thought about that could go wrong?

5.  Neophyte investors--usually like young marriages--buy with only one direction in mind--up. The high divorce rate in general tells those who pay attention other directions are possible.

In one of my previous incarnations I was working my usual ER shift when a big, strapping ex-professional pro football lineman rolled in late one night with a badly swollen, painful red hot great toe infection, the kind that usually ends up getting I&D,

He seemed in a lot of pain as he hobbled over to a gurney and pulled his house slipper off.

"What's your pain level on a scale of 1-10 ?"

"10, man. It's a 10," he shot back without the slightest hesitation.

"That's pretty high," I offered in one of my more empathetic tones.

"Naw, this ain't nothing, doc. I've been through some real pain."

"Such as, "I probed , alluding to his pro football days.

"Naw, that ain't nothing either, doc. I was married for 10 years, man!"

Since at that very time I was going through a painful split with my then live-in girlfriend, I recognized a kindred spirit, infected toe or otherwise.

It was what William Butler Yeats, in his longtime unrequited love for Maude Gonne warned about, the dangers of wooing spirits not kindred of your own soul. It's the same in the market: Do your homework.

Understand what you're getting into and have a ready, viable exit plan before you execute the trade.

I opened his toe, sutured a drain in, put him on an antibiotic and some painkillers while we swapped stories through what was a slower than usual night absent the routine overdoes, MIs, car wrecks and gunshot victims.

6.  Extrapolation, though we all do it, is just another version of taking too much for granted. There's an old joke about the alcoholic who said: " For years his dog never bit him until one night he came home sober." Things change.

Extrapolation in the market is buying or staying with last year's hot sectors, expecting more of the same.

6.  Here's another one: A+B = C. That may apply to numbers but not when A is Alice, B is Bob and C is Charles. Behind the market are millions of individual consciousnesses. Basic market psychology, especially for the general population, is it's more comfortable to buy when asset prices are rising.

Yet some of history's most notable investors like Buffett and the late Sir John Templeton talked about looking for what Templeton called "maximum pessimism."

7.   Related to the above is one of life's biggest myths, one that bureaucrats, politicians and even psychologists never seem to get, that people behave rationally. If you believe that, you've never driven a car in Southern California. And when it comes to investors you can take that to the 10th power.

If you think all these investors the past few years chasing yields, any and practically all yields despite the risk, will turn out unblemished, you've never seen or suffered a bad case of acne.

8.  It's not supposed to be easy. One of the big stories of 2014 is how indexers outperformed the alpha-added crowd. But there was a time not so long ago when the indexers didn't do too well versus the money management boys and girls.

Indexing is the one-size-fits-all trap, the same trap that money management offers when it's leading the parade. And it will again. It's a close relative to the belief that people behave rationally most of the time as they well might. But check your newspaper or click on the Internet or television and tell me how much irrational behavior you see every day.

9.  Learn that just because you know something it doesn't mean everyone else does. And the law of reversibility applies here also.

10. When I was a young guy coming up my dear old mother gave me a simple two part piece of advice that proved quite effective avoiding unwanted trouble. "Take a glass of water before you go to bed and nothing after. Either that or wear protection."

If you're going to play around the markets, don't forget to bring along your own protection. A healthy dose of skepticism not cynicism is a good start.

11. And this one is related to all the others, but it can't be stressed enough--Do your homework.