The Haiku of Finance for 02/18/16

Iran oil glut hint
Opening offer in talks
OPEC may respond

Financial Sarcasm Roundup for 02/15/16

Happy Presidents Day, America. George Washington and Abraham Lincoln never imagined that the Internet would carry their noble messages to the far reaches of the globe. It also carries my sarcasm to those places.

Oil traders are getting more bullish. The bulls may have read my recent writings, or they may be figuring out that bankrupt oil producers can't pump forever before turning off wells. Oklahoma is drowning in liquid black gold and drillers are drowning in red ink. Consolidation this year means fewer slick operators selling flimflam and dry holes next year.

US consumers are spending again. People who went broke during the holidays are now counting pennies saved on lower gasoline prices. They spend those pennies with abandon. Watch your neighbors who aren't saving; they won't survive the onrushing recession. Their homes will be for sale upon foreclosure and I might be waiting with a check in hand.

Franklin Resources' Mark Mobius likes Chinese stock bargains. He misreads garbage as a bargain. Western investors who aren't from Asian bloodlines will never understand the false fronts that Asian financial markets present. Dopey fund managers are born to get clobbered after they buy Chinese state-sponsored Ponzi schemes.

Oil ministers will talk through their mutual pain. Expect lots of crying, wailing, and whining about an oil market that is out of control. Emerging markets got more than they expected when Saudi pumping wrecked their capital accounts. The major oil producers could have used their dollar reserves to diversify away from oil production in the face of UN COP21's coming wealth redistribution scheme. Instead they chose to maintain kleptocratic rentier states and defend their currencies. No one in the developed West should cry for the oil countries that proved too weak to stand up to the Saudis and make their own production cuts.

Presidents Day sales don't apply to political campaign contributions. A dollar for your favorite candidate does not go farther over a holiday weekend.

Financial Sarcasm Roundup for 02/05/16

I avoid watching politicians debate each other on TV because I have more important business tasks to accomplish. I realize I'm giving up a huge source of inspiration for sarcasm. Oh well, we can't have it all in life.

Here comes a new oil barrel tax to fund green technologies. The UN COP21 architects would be proud. I have no problem with this fee. It will destroy part of the US shale industry, but that's to be expected after years of overinvestment in wells that are only economically viable at higher oil prices. Kermit the Frog once said that it's not easy being green, but he didn't mean green energy.

The IMF lectures China on getting into better financial shape. Good luck with that one. China is flailing around for a workable economic policy. Beijing cannot admit that its Ponzi scheme is unraveling because it can't afford to frighten away the Western investors who were dumb enough to start trading the yuan onshore. The IMF can't afford to look bad after adding the yuan to its reserve basket. It all looks like two poker players in a televised tournament who know they can't bluff each other anymore but are still bluffing the audience.

The mortgage bond market just isn't much fun anymore. Taking the punch bowl away is good news for responsible homeowners because there will be fewer secondary bids for mortgage products that should not exist. Issuing paper backed by other paper is usually pretty dumb. Of course, if the Federal Reserve ever had to sell a big chunk of its MBS holdings, the banks would have to hire back MBS traders in a hurry. Catching a falling knife is usually pretty dumb.

More political debates are ahead. They won't mention any of the issues I blogged about here. That's too bad.

The Haiku of Finance for 01/28/16

Safely transport oil
Pipelines are still the best way
Railcars come second

Safely Transporting Oil By Railroad

The oil price crash impacts the railroad sector. Transporting freight gets cheaper, but demand for railcars to bring oil out of the Bakken fields and other places where pipelines were never laid is now dropping off. Refer to US DOT MARAD's 2008 study "Impact of High Oil Prices on Freight Transportation" for technical discussions of how the rail sector behaved under different conditions. Times have changed, perhaps permanently. Safety rules can also change with the times.

Railroad accidents made headlines when America's oil shale boom was roaring. Horrific, sensational railcar explosions are less useful justifications for transportation policymaking than statistics. The US DOT's Federal Railroad Administration (FRA) Office of Safety Analysis has the data. Running a ten-year report shows that total accidents declined by over 31% from 2006 to 2015, with percentage declines in every single subcategory. Rail transport has gotten safer than ever during the oil shale boom.

Oil shale's critics used to claim that Bakken oil was more volatile and thus more dangerous to ship in railcars. The National Transportation Safety Board's (NTSB) chair debunked this claim after some high-profile accidents. A refining industry study also found that Bakken crude fits within existing oil safety standards. The volume of fuel spilled, not its chemical composition, determines its potential hazard. Anyone can search the American Fuel and Petrochemical Manufacturers (AFPM) website for "Bakken crude" and see the evidence.

Forest Ethics does the public a disservice with its alarmist Oil Train Blast Zone tool. The relatively small number of rail accidents could never endanger millions of Americans, as the tool misleadingly implies. Requiring railroad operating companies to emplace blast barriers around every yard and connecting track in populated areas would be costly and probably unnecessary. It would be better for the railroad industry, along with FRA and NTSB, to take a Six Sigma approach to estimating deaths from oil-related transport accidents. Reducing mortality is important and statistics will show us exactly which locations need better safety measures.

Policy advocates are often remarkably ignorant of science, math, and economics. I don't think a typical anti-hydrocarbon advocate can perform an energy returned on energy invested (EROEI) comparison between biofuels (for example) and hydrocarbon fuels. They are welcome to start with refining and transport data from the Western States Petroleum Association and the California Energy Commission but I don't think they'll have the patience to get very far.

I am not prepared to demonize tar sands and oil shale as "extreme fuels" in the style of some renewable energy advocates. Hydrocarbon energy will be part of human life for a few more decades until renewable energy's infrastructure catches up. Pipelines are the safest and cheapest way to transport oil over long distances. Railcars are still the next best way despite the pleadings of safety paranoiacs.

Financial Sarcasm Roundup for 01/26/16

The Beatles once sang about having "A Hard Day's Night." That's unintentionally sarcastic. If your hard day continues into the night, you may have a lifestyle problem.

JP Morgan Chase wants to turn your smartphone into an ATM. People need to think hard about this very risky approach. Tapping a smartphone to an ATM means anyone who holds the phone can get your cash. It will be a boon for pickpockets and armed robbers. JP Morgan's IT people need to code some hard-core biometric identification tools into their ATM app before it goes live. I think a saliva sample would work nicely. Just lick your smartphone's screen before you tap for that cash.

Apple's iPhone sales are slipping. Here's the latest evidence that a long-term bet on endless China growth is the corporate strategy of five years ago, not today. The inevitable US sales peak will come when Apple's too-stupid early adopter segment finally realizes that they can do without spending $800 every eighteen months for an incremental improvement in camera resolution. Oh yeah, the Apple Watch looks like the company's first dud since the Newton scratchpad. I knew the Watch was useless as soon as I saw it. Watches cannot be scaled down versions of smartphones due to their display size but nobody at Apple was thinking about biometrics. Tech marketers fall for their own hype at the tops of market bubbles.

Oil producers that cut costs can survive earnings season. The ones who drilled $60/boe wells expecting to make $100/boe forever are toast. I was really getting sick of hearing from unproven junior E+P companies tout their shale wells. They can have their remaining employees take turns sucking the oil out through big straws if they can't afford fracking fluids anymore.

I usually have a great day's night, unlike the Beatles. I studiously avoid the Notre Dame Club of San Francisco because those people used to ruin both my days and nights when I met them. No one can ever ruin me now.

The Haiku of Finance for 01/20/16

Fear drives stock selling
Oil still finding bottom price
No final crash yet

The Haiku of Finance for 01/18/16

Iran oil flood due
Drivers welcome cheaper fuel
Fill up now to save

Oil Slump Leads To Shale 2.0, The Great Crew Change, And COP21

The oil sector's bear attack shows no signs of abating. OPEC's Saudi-led push for huge overproduction is driving the US shale sector to the brink of collapse. The post-crash survivors can benefit from "Shale 2.0" technologies that keep their costs down. They will need every advantage they can get when the "Great Crew Change" makes finding human talent harder and the UN's COP21 protocols make hydrocarbon production less desirable.

High-sulfur US crude varieties are now so uneconomical that they command prices near zero or even negative in refining. You know your sector is in trouble when you have to pay customers to take your worst product away. Large US banks are strengthening their loss reserve allowances as loans to oil producers reach default thresholds. Thank the Federal Reserve for increasing required capital cushions. Some financial players tracking the oil sector have begun clamoring for a federal bailout. The energy sector's financiers did not get the memo that bailouts are political non-starters. Miscellaneous regulatory changes in Washington may make it easier for surviving drillers to market their product. Financial backstops for the entire sector are very unlikely now that regulators have learned lessons from the 2008 systemic crisis.

Oil drillers who survive the slump will contend with more favorable economics, and not just from an eventual rise in market prices. The Manhattan Institute's "Shale 2.0" study argues that Big Data will bring a revolution to oil drilling that dramatically reduces its cost structure. The think tank's longer study is worth reading for technical insights. Lower production costs across North America will make the continent's production less responsive to OPEC production changes.

Another factor working in the oil sector's long-term favor is the need for a "Great Crew Change" replacing the sector's retiring experts. OGFJ's coverage of the Great Crew Change reveals that hiring to replace experts is less of a priority when oil prices are low and producers shut rigs down. Hiring younger Big Data experts will bring the Shale 2.0 cost benefits to financially healthy producers first, giving them market power as they restart exploration. Only the financially healthiest producers can afford to both replace retired talent with new STEM hires and replace depleted fields with new exploration.

One other complicating factor facing oil shale producers is the finalization of the UN's Paris COP21 climate change protocols. The new regime will use both regulatory and financial incentives to discourage hydrocarbon production and favor renewable energy generation. The regime includes financial support for developing nations whose energy exports will suffer as their oil production is rendered uneconomic. US oil drillers who can afford to comply with COP21's controls may have a window of opportunity if some OPEC producers are deterred from production.

The oil sector's pain will pass at some point. US producers who are currently sour on crude (pun intended) will relish the economic advantages they can reap by being first to implement Shale 2.0 tech, first to hire younger engineers in the Great Crew Change, and firs to adapt to COP21 controls. The largest and least leveraged US oil producers should be first in line when the race begins again.

Full disclosure: Long position in USO.

The Haiku of Finance for 01/08/16

Cascading oil price
Energy sector ruin
More high-yield bursting

Madalena Energy Drills Where It Chills

Madalena Energy (Canadian ticker MDN.V, US ticker MDLNF) caught my eye back in 2014. They're based in Canada and they drill for oil and gas there too, but they also drill in Argentina. I have long been skeptical of the chances for junior exploration companies who locate their offices in North America but chase properties in developing countries. Raising capital in the easiest markets isn't the same as successfully drilling in difficult markets.

I always check the company's management team first. The current CEO was educated as a petroleum engineer but spent a lot of time in consulting and investment banking. I usually like it when company leaders have degrees in their sector but successful field work has to flesh that out. Companies in the business of finding and pumping oil must have leaders who have successfully done that for their entire careers. I am similarly unimpressed with other senior team members who had undefined positions with other companies, some of which no longer exist. I can't judge their abilities if I don't know what they did or why their former employer isn't around anymore.

The company's four Canadian properties must get pretty darn cold in the winter. Three of them are producing. The Argentina properties are a slightly different story. Some of the properties appear to be in production but it's hard to tell from the website's descriptions. I did not find any NI 51-101 reports anywhere on the Madalena Energy website, so it is impossible for me to verify each property's potential.

Geopolitical risk is always worth noting. Canada ranks 10th on Transparency International's Corruption Perceptions Index and 6th on the Heritage Foundation's Index of Economic Freedom. Meanwhile, Argentina ranks 107th for corruption and 169th for economic freedom. That is a huge delta in risk for investors from other countries. Argentina may start moving in the right direction after its recent political changes. International investors will be watching for progress.

I downloaded Madalena's quarterly financial statements and MD+A dated September 30, 2015. There's no pretty picture here. The accumulated deficit in shareholder's equity (or what we Americans typically call negative retained earnings) is now at -CAD$115M. Inexperienced investors need to recognize this type of negative figure as the amount of invested capital earlier investors have put into a company that has not yet earned it back. The company has $11M in cash on hand and swung to a $14M profit after losing money in much of 2014, so they are above what would otherwise be a burn rate for now.

The weakness of Canadian and Argentinian currencies against the US dollar probably helps this company's bottom line. Argentina recently relaxed its currency controls, devaluing the Argentinian peso against the US dollar. Note 2 in the company's quarterly financial statement says their Argentinian invoices have been in US dollars and their planned capex for Argentina is weighted to US dollar denominated expenditures. Argentina's currency devaluation means financing in US dollars and spending against a falling Argentinian peso will make Madalena's capex in the country less expensive. This is good news given the company's negative free cash flow for most of 2015.

Madalena deserves kudos for actually producing oil and gas, something many junior resource companies never do. The company's fortunes in Argentina may improve if the new government there takes reform seriously. One big problem facing the entire oil and gas sector is the continuing weakness in world oil prices. Bearish oil markets will challenge Madalena's ability to sustain the success it experienced in late 2015.

Full disclosure: No position in Madalena Energy at this time.

The Limerick of Finance for 12/27/15

Small refineries once had it made
Easy finance meant midstream got paid
Now the landscape is bleak
Oil pricing remains weak
Now it's cheaper to split every grade

The Limerick of Finance for 12/20/15

Brent crude prices testing new low
Strong dollar puts on a good show
Traders can't find price floor
Oil exporters pump more
Production still has room to grow

Financial Sarcasm Roundup for 12/07/15

Forbes thinks we should buy stocks before the Federal Reserve raises its interest rate target. Some editors forgot to mention that even a slightly higher cost of capital will force companies with weak balance sheets into serious trouble. I shake my head whenever a media publication that is obviously not a licensed brokerage purports to give financial advice to readers whose personal situations it cannot know. There's more to bank stocks than book value. Buying one without knowing its Texas ratio or capital adequacy ratio is like buying a pig in a poke.

Lower oil prices offer some support to long-term bond prices. I'll believe that correlation holds when someone shows me data for a time series longer than 48 hours. Interest rates still govern the yield curve in every country with a bond market. Any rise in the Fed's target rate means oil loses its hold on bond prices and the long end of the curve comes under downward pressure. It must be a slow news day when bond traders need to swallow an argument for tracking oil prices instead of the risk-free rate of return. I never ignore sovereign credit risk, but that concern escapes bond fund managers who take their eye off the ball and get distracted by oil.

I have noticed lots of mixed reactions lately about the IMF's acceptance of the Chinese yuan as a reserve currency. There's always an echo chamber blathering about how this is some harbinger of China's renewed rise to world dominance. Gimme a break already. When China matches the US's ranks on various data indexes for development and the rule of law, it will be trustworthy as a regional hegemon. I think a lot of the noise about the yuan is driven by portfolio managers who would like their Chinese positions to be more liquid in case they have to sell out quickly. Chinese elites buying vacation homes in California are already selling out.

Once again, there is no financial advice to be found at Alfidi Capital. I don't write this way to help anyone. I amuse myself when nutty market events are on my radar.

The Haiku of Finance for 10/15/15

Oil drillers sinking
Eager investors jumped in
Money down the hole

Financial Sarcasm Roundup for 09/07/15

One great thing about this blog is that visitors from the future can see how sarcastic I was at this point in history. I will be just as sarcastic in the future.

Japan's Q2 GDP is still down, no matter how you slice the inventory numbers. Maybe they could slice up some sushi rolls to go with those numbers. I'll have the dragon roll and California roll, please, because one plate is never enough. Abenomics is still in vogue over on that side of the Pacific Ocean. It will probably survive until a round of hyperinflation ruins the ability of ordinary Japanese to purchase very expensive imported foodstuffs for their sushi.

China is rapidly selling off its foreign exchange reserves to support its stock markets and currency. The US is not at all prepared for a sudden run on the dollar, but that is now very likely as more central banks follow China's path. Janet Yellen and Stanley Fischer are going to have some sleepless nights at the Eccles Building running scenarios on how to mitigate a dollar run. I expect pizza delivery services in Washington, DC will work overtime when the Federal Reserve starts pulling all-nighters.

Global supply and demand keep pushing oil prices down. Gas-guzzling Americans can enjoy a few more months of easy motoring. It's premature to call a bottom as long as financially weak oil service firms have access to cheap lines of credit in the US. I await the high yield debt market's collapse and the de-listing of multiple oil companies before I consider the sector a bargain.

If this blog were food, it would probably taste like vinegar.

The Haiku of Finance for 08/15/15

Oil price keeps sliding
Oversupply still coming
Wells still pumping fast

Continuing Oil Crash Points The Way To 2015's Energy Bargains

The second coming of 2015's oil bear market is going on right about now.  Plenty of bargain hunters who thought they bought into the bottom of the oil rout a few months ago are having buyer's remorse.  Watch Brent fall to 49 today and WTI fall to 43 as Saudi pumping cuts the legs out from under US shale producers.  Energy stocks can still get cheaper.  Finding the ones likely to survive this bear market takes serious sleuthing.

Forget about hunting junk bond bargains.  The oil services sector in the US is not done culling its own herd.  Junior producers are still pumping at full volume just to make it look like they can service their high-yield debt with cash flow.  That charade still has a few more months to run.  Any hedge funds or well-heeled private investors who think energy sector junk bonds have bottomed are welcome to try their luck.  Some people learn the hard way.

Other oil targets abound.  Owning BNO means betting on Brent crude futures and owning USO means betting on WTI crude futures.  Any compression between the Brent and WTI spot prices reduces the potential for arbitrage between these two ETFs.  More exotic bets like DBO and USL look like very complicated ways of leveraging a single commodity price.  Simple securities have fewer risks than complex ones.  The ETFs and other instruments betting on the magnitude of changes in oil prices have more moving parts than I can track.

The least complex ETF for exposure to the oil producing sector is probably XLE,  Holding a representative sample of large energy producers means each producer's operating costs are diversified away.  A simple equity ETF also has no internal leverage, so it does not expose its owners to exorbitant expenses or magnify their losses.  The P/E of 22 still looks high and resembles the broader equity market's high P/E after years of central bank stimulus.  A weakening sector should be priced at a bargain to the broader market, so XLE may have further to fall.

The price of oil itself may have further to fall.  Saudi Arabia is not reducing its production.  Storage is full in the US and shipping companies are seeing booming business in chartering tankers just for offshore storage.  Iran may have already begun selling the oil it has stored and will certainly increase production later in 2015 as the end of sanctions allow it to export.  I do not believe oil traders have priced in the effects of full production from Iran and other Middle Eastern countries that badly need hard currency.  More pain for the US oil sector means more bargain entry points for investors.

Full disclosure:  No positions in any securities mentioned.

The Haiku of Finance for 07/02/15

Oil spill settlement
Final pre-tax charge is done
Sell chunks or get bought

The Limerick of Finance for 05/31/15

Saudi oil pumping not slowing down
OPEC's leader hangs on to its crown
Meet domestic demand
Keep jihadists in hand
Shale producers prepare to leave town