Month: November 2014

Last year was bad. This year is an outright disaster.

As we reported earlier using ShopperTrak data, the first two days of the holiday shopping season were already showing a -0.5% decline across bricks-and-mortar stores, following a “cash for clunkers”-like jump in early promotions which pulled demand forward with little follow through in the remaining shopping days. However, not even we predicted the shocker just released from the National Retail Federation, the traditionally cheery industry organization, which just reported absolutely abysmal numbers: sales during the four-day Thanksgiving holiday period crashed by a whopping 11% from $57.4 billion to $50.9 billion, confirming what everyone but the Fed knows by now: the US middle class is being obliterated, and that key driver of 70% of US economic growth is in the worst shape it has been since the Lehman collapse, courtesy of 6 years of Fed’s ruinous central planning. 

Demonstrating the sad state of America’s “economic dynamo”, shoppers spent an average only $380.95, down 6.4% from $407.02 a year earlier. In fact, as the NRF charts below demonstrate, there was a decline across virtually every tracked spending category (source):

As the WSJ reports, NRF’s CEO Matt Shay attributed the drop to a combination of factors, including the fact that retailers moved promotions earlier this year in attempt to get people out sooner and avoid what happened last year when people didn’t finish their shopping because of bad weather.

Also did we mention the NRF is perpetually cheery and always desperate to put a metric ton of lipstick on a pig? Well, hold on to your hats folks:

He also attributed the declines to better online offerings and an improving economy where “people don’t feel the same psychological need to rush out and get the great deal that weekend, particularly if they expected to be more deals,” he said.

And there you have it: a 11% collapse in retail spending has just been spun as super bullish for the US economy, whereby US consumers aren’t spending because the economy is simply too strong, and the only reason they don’t spend is because they will spend much more later. Or something.

Apparently the plunge in Americans who even care about bargains is also an indication of an economic resurgence:

The retail trade group said the number of people who went shopping over the four-day weekend declined by 5.2% to 134 million, from 141 million last year.

Finally, what we said earlier about a surge in online sales, well forget it – it was a lie based on the now traditional skewed perspectives from a few self-servcing industry organizations:

Despite many retailers offering the same discounts on the Web as they offered in stores, the Internet didn’t attract more shoppers or more spending than last year. Online sales accounted for 42% of sales racked up over the four-day period, the same percentage as last year, though up from 26% in 2006, the trade group said.

In fact, it was worse: “Shoppers spent an average $159.55 online, down 10.2% from $177.67 last year.”

But the propaganda piece de resistance is without doubt the following:

“A highly competitive environment, early promotions and the ability to shop 24/7 online all contributed to the shift witnessed this weekend,” Mr. Shay said.

So to summarize: holiday sales plunged, and Americans refused to shop because the economy is stronger than ever and because Americans have the option of shopping whenever.

Goebbels approves.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/kbup_4fQiWQ/story01.htm Tyler Durden

It's not just Shale oil stocks in the US that are hurting. Following the OPEC decision to not cut production and squeeze US producers, Saudi Arabia's major stock market index has tumbled into a bear market, giving up all the year's gains. As one analyst noted, "investors are afraid if oil stays where it is, it will negatively impact the government revenues, thus creating potential headwinds on government spending." Dubai stocks – our long-time favorite bubble index – has also been hammered, down over 7% intraday at its worst…

 

 

As Bloomberg reports,

Saudi Arabian stocks plunged into a bear market after OPEC took no action to stem a slump in oil, triggering a rout in Middle Eastern equities.

 

The Tadawul All Share Index (SASEIDX) retreated as much as 6.3 percent, the most since March 2011, before settling 4.8 percent lower at the close in Riyadh.

 

…

 

“Investors don’t like the potential macro backdrop if oil continues to slide, which is being reflected in the markets,” Ali Khan, chief executive officer of London-based BGR Asset Management LLP, said by e-mail. “Investors are afraid if oil stays where it is, it will negatively impact the government revenues, thus creating potential headwinds on government spending.”

 

…

 

“It’s mostly panic selling today,” Tariq Qaqish, head of asset management at Dubai-based Al Mal Capital PSC, said by phone. “Investors are worried about a possible slowdown in government spending, which would affect corporate earnings going forward.”

*  *  *

But apart from that, low oil prices are unequivocally good…right?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/7FnMLnj6iME/story01.htm Tyler Durden

Submitted by Raul Ilargi Meijer via The Automatic Earth,

I thought it might be a nice idea to question a certain someone’s theories using their own words, while at the same time showing everybody what the dangers are from falling oil prices. There are many ‘experts and ‘analysts’ out there claiming that economies will experience a stimulus from the low prices, something I’ve already talked about over the past few days in The Price Of Oil Exposes The True State Of The Economy and OPEC Presents: QE4 and Deflation. And I’ve also already said that I don’t think that is true, and I don’t see this ending well.

Today, our old friend Ambrose Evans-Pritchard starts out euphoric, only to cast doubt on his self-chosen headline. He’d have done better to focus on that doubt, in my opinion. And I have his own words from earlier in the year to support that opinion. Ambrose is bad at opinions, but great at collecting data; his personal views are his achilles heel as a journalist. That’s maybe why he fell into the propaganda trap of picking this headline; after all, if you write for the Daily Telegraph you’re supposed to write positive things about the economy.

Oil Drop Is Big Boon For Global Stock Markets, If It Lasts

Tumbling oil prices are a bonanza for global stock markets, provided the chief cause is a surge in crude supply rather than a collapse in economic demand

 

Roughly one third of the current oil slump is a shortfall in expected demand, caused by China’s industrial slowdown and Europe’s austerity trap. The other two thirds are the result of a sudden supply glut, which Saudi Arabia and the Gulf states have so far chosen not to offset by cutting output. This episode looks relatively benign. Nick Kounis from ABN Amro says it will add $550 billion of stimulus to world markets. “That is fantastic news for the global economy,” he said. But it comes at a time when stocks are already high if measured by indicators of underlying value. The Schiller 10-year price earnings ratio is at nose-bleed levels above 27.

 

Tobin’s Q, a gauge based on replacement costs, is stretched to near historic highs. Andrew Lapthorne from SocGen says the MSCI world index of stocks has risen 38% over the last three years but reported profits have risen just 3%. “Valuations, as measured by median price to cash flow ratios, are near historical highs. As US QE has come to an end, depriving the world of $1 trillion printed dollars a year, there are plenty of reasons to be nervous,” he said.

Ambrose’s gauge of share values is dead on, and far more important than he seems to realize. He knows full well there are tons of reasons to doubt his own headline. But he still leaves out many of those reasons in that article today. So let’s move back in time to look at what he wrote this summer, before the drop in oil prices.

Here are a few lines from Ambrose on July 9 2014:

Fossil Industry Is The Subprime Danger Of This Cycle

The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal. This is where investors have been throwing the most good money after bad. [..] oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building.

 

This has never happened before in US history, even during the Second World War when oil production was a strategic imperative. The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900 billion from 2000 to 2008 as the boom gathered pace. It has since stabilised at a very high plateau, near $950 billion last year. The cumulative blitz on exploration and production over the past six years has been $5.4 trillion [..]

 

… upstream costs in the oil industry have risen 300% since 2000 but output is up just 14% [..] The damage has been masked so far as big oil companies draw down on their cheap legacy reserves.

 

… companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even. The Canadian tar sands mostly break even at $80-$100. Some of the Arctic and deepwater projects need $120. Several need $150. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron and Repsol are together gambling $340 billion in these hostile seas.

… the biggest European oil groups (BP, Shell, Total, Statoil and Eni) spent $161 billion on operations and dividends last year, but generated $121 billion in cash flow. They face a $40 billion deficit even though Brent crude prices were buoyant near $100 ..

… the sheer scale of “stranded assets” and potential write-offs in the fossil industry raises eyebrows. IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6%, lower than in 2001 when oil was trading at $27 a barrel.

 

What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it – to a gullible foreigner.

 

… the low-hanging fruit has been picked and the costs are ratcheting up. Three Forks McKenzie in Montana has a break-even price of $91. [..]

 

“Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades , compared with business as usual,” said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.

 

By their actions, the oil companies implicitly dismiss the solemn climate pledges of world leaders as posturing, though shareholders are starting to ask why management is sinking so much their money into projects with such political risk.

Those numbers alone, combined with the knowledge that prices are off close to 40% by now, should be enough to give anyone the jitters, about the oil industry, and therefore about the global economy. Any industry that’s so deeply in debt cannot afford a 40% dip in revenue, not even for a short while. Dominoes must start tumbling in short order.

And of course saying ‘any industry so deeply in debt’ is already a bit misleading, because there is no industry like oil in the world (except maybe steel, and look how that’s doing), and it’s highly doubtful there’s another one with such debt levels. Oil stocks are down somewhat, but it’s hard to see how they could not fall a lot further. And as for the huge amounts invested in energy junk bonds, one can but shudder.

On August 11 2014, Ambrose had some more:

Oil And Gas Company Debt Soars To Danger Levels To Cover Cash Shortfall

The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106 billion in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time.

 

They also sold off a net $73 billion of assets. [..] The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568 billion over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly.

 

… the shortfall between cash earnings from operations and expenditure – mostly CAPEX and dividends – has widened from $18 billion in 2010 to $110 billion during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39 billion on repurchases since 2011.

 

… “continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development”. [..] upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9% in 2012, and 11% last year. Upstream costs rose by 12% a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology. This was disguised as China burst onto the world scene and powered crude prices to record highs.

 

Global output of conventional oil peaked in 2005 despite huge investment. [..] the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” ..

 

Analysts are split over the giant Petrobras project off the coast of Brazil, described by Citigroup as the “single-most important source of new low-cost world oil supply.” The ultra-deepwater fields lie below layers of salt, making seismic imaging very hard. They will operate at extreme pressure at up to three thousand meters, 50% deeper than BP’s disaster in the Gulf of Mexico.

 

Petrobras is committed to spending $102 billion on development by 2018. It already has $112 billion of debt. The company said its break-even cost on pre-salt drilling so far is $41 to $57 a barrel. Critics say some of the fields may in reality prove to be nearer $130. Petrobras’s share price has fallen by two-thirds since 2010.

 

… global investment in fossil fuel supply rose from $400 billion to $900 billion during the boom from 2000 and 2008, doubling in real terms. It has since levelled off, reaching $950 billion last year. [..] Not a single large oil project has come on stream at a break-even cost below $80 a barrel for almost three years.

 

… companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120 . The IEA says companies have booked assets that can never be burned if there is a deal limit to C02 levels to 450 (PPM), a serious political risk for the industry. Estimates vary but Mr Lewis said this could reach $19 trillion for the oil nexus, and $28 trillion for all forms of fossil fuel.

 

For now the major oil companies are mostly pressing ahead with their plans. ExxonMobil began drilling in Russia’s Arctic ‘High North’ last week with its partner Rosneft, even though Rosneft is on the US sanctions list. “Exxon must be doing a lot of soul-searching as they get drawn deeper into this,” said one oil veteran with intimate experience of Russia. “We don’t think they ever make any money in the Arctic. It is just too expensive and too difficult.”

Plummeting oil prices not only mirror the state of the – real – economy, they will also drag the state of that economy down further. Much further. If only for no other reason than that today’s oil industry swims in debt, not reserves. Investment policies, both within the industry and on the outside where people buy oil company stocks and – junk – bonds, have been based on lies, false presumptions, hubris and oil prices over $100.

The oil industry is no longer what it once was, it’s not even a normal industry anymore. Oil companies sell assets and borrow heavily, then buy back their own stock and pay out big dividends. What kind of business model is that? Well, not the kind that can survive a 40% cut in revenue for long. The industry’s debt levels were, in Ambrose’s words, at a ‘danger level’ when oil was still at $110.

Is Big Oil still a going concern? You tell me. I don’t want to tell the whole story bite-sized on a platter, there’s more value in providing the numbers, this time from Ambrose but there are many other sources, and have you make up your own mind, do the math etc.

Ambrose’s exact numbers can and will be contested three ways to Sunday, but his numbers are not that far off, and if anything, he may still be sugarcoating. WTI closed at $66.15 on Friday, Brent is at $70.15. Given the above data, where would you think the industry is headed? What will happen to the trillions in debt the industry was already drowning in when oil was still above $100?

And how will this be a boon to the economy even if, as Ambrose puts it, the ”oil drop lasts”? Do you have any idea how much your pension fund is invested in oil? Your money market fund? Your government? I would almost say you don’t want to know.

There can be very little doubt that oil prices will at some point rise again from whatever bottom they will reach. Even if nobody knows what that bottom will be. At the same time, there can also be very little doubt that when that happens, the energy industry’s ‘financial landscape’ will look very different from today. And so will the – real – economy.

Cheap oil a boon for the economy? You might want to give that some thought.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/pjnqJn0Dqdw/story01.htm Tyler Durden

For most people “a deal to die for” is just a saying, but tragically for a 22-year-old woman who was working in a Chicago Nordstroms off North Michigan Avenue it became all too real when she shot during Black Friday shopping and died a day later, in what according to initial reports was a domestic-related incident leading to a panicked stampede out of the store by holiday shoppers who were convinced they were caught in the latest Chicago consumerism-gone-wild crossfire.

AP reports that Nadia Ezaldein, 22, who was a seasonal employee at the store, was pronounced dead at 3:43 p.m. on Saturday. Authorities say the shooter was 31-year-old Marcus Dee, who fired on Ezaldein before killing himself.

Officers found her dead when they arrived Friday night at the store along Chicago’s Magnificent Mile shopping district. The store was closed Saturday and was to reopen on Sunday. Nordstrom spokeswoman Tara Darrow called the shootings a “really sad and scary situation.” She says the company is doing its best to support employees.

According to the Chicago Tribune, the 31-year-old shooter was targeting his “girlfriend or ex-girlfriend,” said John Escalante, chief of detectives for the Chicago Police Department.

“She was working up on the second floor when he approached her, fired one shot, which struck her,” Escalante said on the scene. “He then turned the gun to himself and shot and killed himself.”

Responders found the gunman dead when they arrived, and the 22-year-old woman was taken to Northwestern Memorial Hospital in critical condition, Escalante said. The shooting happened about 8:30 p.m. Friday.

More from the Tribune:

According to a police report, the shooter, identified as Marcus Dee, approached the woman at the store and they spoke with each other. He took out a gun, and as the woman walked away from him, he shot her in the head/neck area before shooting himself in the head. He was pronounced dead at the scene at approximately 10:23 p.m., the report said.

 

The crowded store, at 55 E. Grand Ave. in the Shops at North Bridge mall on North Michigan Avenue, was hurriedly emptied of holiday shoppers after the shooting, according to witnesses.

 

The Nordstrom store will be closed Saturday, according to its website. The other stores in the shopping center are open Saturday, according to mall.

 

“This is an active scene, an ongoing investigation, but again I can tell you it is domestic-related,” Escalante said.

To the present masses of people chasing after Black Friday deals in the store, the cause for the shooting was irrelevant: shoppers at the store described panic and chaos caused by the shooting.

Michelle Smith, 47, was buying purses with her daughter Krystal, 25, when they suddenly heard two gunshots right after the other. “It was a pow and a pow,” said Michelle Smith. “It was a stampede coming down the escalator.”

 

Suzanne Nanos-Gusching was on the third floor with her daughter who was trying on a dress for a sorority formal at the University of Michigan when shots rang out. Soon after, employees were trying to clear the building.

 

“We just saw people running out, and they (the employees) rushed her to get dressed,” said Nanos-Gusching. “They were adamant about getting us out of the building.”

 

Michael Nelson, who works at a watch boutique in the Nordstrom building in the mall, said he saw people clamoring to leave without realizing what had happened. “They looked scared, people were falling over each other (to get out),” said Nelson.

The only silver lining: the murder was not related to angry – and well-armed – Black Friday Chicago shoppers taking each other out in pursuit of the latest “must have” 55 inch LCD TV.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zk71tFOABpo/story01.htm Tyler Durden

Authored by Mark St. Cyr,

There’s probably no other place more enthralled with its own state of being today than Silicon Valley. Now probably more than ever the tech capital just might be believing their own hype more now, than in the “glory days” of the 90’s.

Today the belief is so strong, so internalized that the coding kingdom is where the new rulers of the universe reside, that it would make the Kadashians think about trying to keep up with the “Coders.” (does anyone need anymore proof than the new Kim Kadashian app?)

The problem with mirrors is just that – they’re mirrors. And unless you take your gaze away from it and look around once in a while, what happens more times than not is you miss all that’s happening around you. Till one day you either walked smack dab into a wall, or worse – never left the couch as the city around you fell into chaos.

This is where I believe a great many in the “disruptive” world are going to find themselves. No, not them disrupting – but the world they now inhabit is about to be – disrupted. i.e., The valuations, the deals, the whatever that were once taken for granted as a “never-ending story” is seemingly not only coming to an end. That end – might already have taken place.

Personally I read a lot of tech blogs, tech sites, and more. One reason is I’m just plain interested as well as curious. The other is that I’m in the “entrepreneur/business advice” business. And nothing has fascinated me more than some of the “pie in the sky,” “unicorn and rainbow” type thinking and metric measuring than what I both read and hear from the tech world.

This area is so audacious in its shunning of pure true business models (i.e., making real money via repeatable commerce transactions as opposed to the singularity event of IPO-ing) it would make a Krugman-ite proud. However, as I alluded to earlier: there seems to be cracks appearing in the looking-glass.

There’s an underlying truth when it comes to business. And I do mean – all business: When times are good those at the top are jubilant – when jubilant fades and testiness begins to appear, regardless of how faint – that is the time to begin paying very, very, close attention.

Recently I read an article that is becoming more and more prevalent within both the investing world and in particular the tech arena. The article was titled: “The Thin Skin of the Venture Capital Market”

One of the quotes that caught my eye was this. It was in response to a point on a valuation…

“And then I promptly got Twitter flack from one of the people who works at one of the company’s investors.  They seemed annoyed that I said anything in the first place.

 

What was said, who’s right, etc., doesn’t much matter.  The fact is, it’s just not cool to criticize the investing side of the venture capital market.”

Remember my assertions – It’s not about making a profit in business, it’s now only about the business in making an “investment” profit. As I’ve reiterated repeatedly, the business per se is irrelevant – it’s all about can the business “story” be sold to Wall Street. Then who gives a rats arse how the story ends, that’s for the poor saps that bought into it, not us. We cha-chinged out!

Increasingly the proverbial “cha-ching” machine is growing more silent. One would think with the markets once again pushing beyond stratospheric levels into black sky territory that the deals would just keep coming. Well, they are yet again there seems to be something a little different in the ways these deals are coming forward than previous.

To the casual observer one might think “they’re doing more deals than ever before!” Yet, what may seem as an uptick might be more of an illusion. More in a shorter time span doesn’t necessarily mean “more.” What it could be signalling is a rush to get as many in as soon as possible because there just might be “no moar.”

Recently a few articles have caught my eye. One showing up on Pandodaily™ as reported by their West Coast Editor Michael Carney. What I found quite telling was the headline along with the timing: Does the shrinking time between early stage rounds signal market bullishness or disaster planning?

Is it not precariously illuminating that suddenly, what some may think as “out-of-the-blue” the investing meme once thought of as “unstoppable” is suddenly causing those within the very industry itself to contemplate?

And why would this meme even be questioned? For are we not in a glorious time for investing? Especially in new and never-ending “disruptive” agents? What would cause any change in this meme?

How about the meme killing realization that QE, the once unthinkable, unstoppable, buying spree fuel additive has been throttled. (for how long is anyone’s guess, but for now – the valve is closed)

That is the (and I do mean “the”) only variable that has changed. And with it, there seems to be an undercurrent of possible disruption coming to the royalty-class aka the “disruptive” class.

Another article that is also quite informative into what maybe transpiring within the VC arena along with its overarching mindset is the Q2 2014 Halo Report.

Highlights of the Q2 2014 Halo Report include:

• Pre-Money Valuations Climb to $3M.  Median pre-money valuations rose to $3.0 million in Q2 2014 from $2.7 million in Q1, and after several steady quarters at $2.5 million.
• Angel Round Size Falls.  Median angel financing rounds fall to $600k in Q2 2014 –  down 40% from Q1; remain flat versus Q2 2013 where the median round size was $595k.

Again, at first glance I found it quite interesting that today, when the markets are hitting upward prints of nearly 1% per week that the median financing round would fall 40%.

I can’t stress this point enough: The markets are rising, and investment in median financing rounds are falling by double-digit percentages?

Sorry to repeat ad nausea but (and it’s a very big but), all that’s changed in this period of time is QE has stopped.

Is this causation or correlation? That’s the call. For my money – it’s causation. However only time will tell for if one thing is clear, I never dreamed we could get up this high based on QE, but here we are. Although too not pay attention to these possible cracks would be ludicrous. Especially when paired with the timing of their appearance.

There are two more glaring signs that things have changed. First is what I warned to watch for in this latest earnings cycle where the once “darlings” of Wall Street might be met with more of a cold shoulder than open wallets with the realization QE was in actuality going to stop. e.g. Facebook™ and the concern about whether or not this new reality of “no QE” will be expressed via investor concerns.

From my article “The Shot Heard Round The Valley World” I opined…

“Let me go on the record here and point out what I believe will prove my point in the coming weeks and months.

 

Currently Zuck and crew have been lauded over with the prowess in its acquisition choices. You will know everything has changed when the calls to rescind Mark Zuckerberg’s authority in having carte blanche via not needing board approval for acquisitions going forward is demanded by Wall Street.”

What transpired during the most recent earnings call? At first it was heralded as “hitting on all cylinders” then it was revealed – it was also going to spend at just as impressive rate.

Suddenly “woo-hoo” turned into “WTF!” and the shares gapped down and as of yet – with the ever rising, incessant push higher, and higher in the markets, where both the indexes for everything tech as well as the S&P are hitting “never before seen in the history of mankind highs.” Facebook not only hasn’t filled that gap (which by all accounts should be viewed as on sale) it hasn’t basically moved at all.

Again, as everything else is roaring higher. Suddenly it seems that ability to “spend” is coming under far more scrutiny than the once “blind-eye” it was turned just a few months prior. And it’s only the beginning in my view.

For those wanting to see what may be coming and dig a little deeper the article by Todd W. Schneider titled, “The TechCrunch Bubble Index: Parsing Headlines to Quantify Startup Hype” breaks down this idea of growing changes in an easy viewable form.

There’s nothing wrong with pushing the needles when it comes to business, entrepreneurship, and more. However, it’s once you not only start believing your own press, but you look to place mirrors around you as to get an even grander view is when you just might be having more in common with the Kadashians than you do with creating and maintaining your business.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/tpg2-zI3e00/story01.htm Tyler Durden

From Jawad Mian of Outside the Box

Investment Observations

The precipitous decline in the price of oil is perhaps one of the most bearish macro developments this year. We believe we are entering a “new oil normal,” where oil prices stay lower for longer. While we highlighted the risk of a near-term decline in the oil price in our July newsletter, we failed to adjust our portfolio sufficiently to reflect such a scenario. This month we identify the major implications of our revised energy thesis.

The reason oil prices started sliding in June can be explained by record growth in US production, sputtering demand from Europe and China, and an unwind of the Middle East geopolitical risk premium. The world oil market, which consumes 92 million barrels a day, currently has one million barrels more than it needs. US pumped 8.97 million barrels a day by the end of October (the highest since 1985) thanks partly to increases in shale-oil output which accounts for 5 million barrels per day. Libya’s production has recovered from 200,000 barrels a day in April to 900,000 barrels a day, while war hasn’t stopped production in Iraq and output there has risen to an all-time high level of 3.3 million barrels per day. The IMF, meanwhile, has cut its projection for global growth in 2014 for the third time this year to 3.3%. Next year, it still expects growth to pick up again, but only slightly.

Everyone believes that the oil-price decline is temporary. It is assumed that once oil prices plummet, the process is much more likely to be self-stabilizing than destabilizing. As the theory goes, once demand drops, price follows, and leveraged high-cost producers shut production. Eventually, supply falls to match demand and price stabilizes. When demand recovers, so does price, and marginal production returns to meet rising demand. Prices then stabilize at a higher level as supply and demand become more balanced. It has been well-said that: “In theory, there is no difference between theory and practice. But, in practice, there is.” For the classic model to hold true in oil’s case, the market must correctly anticipate the equilibrating role of price in the presence of supply/demand imbalances.

By 2020, we see oil demand realistically rising to no more than 96 million barrels a day. North American oil consumption has been in a structural decline, whereas the European economy is expected to remain lacklustre. Risks to the Chinese economy are tilted to the downside and we find no reason to anticipate a positive growth surprise. This limits the potential for growth in oil demand and leads us to believe global oil prices will struggle to rebound to their previous levels. The International Energy Agency says we could soon hit “peak oil demand”, due to cheaper fuel alternatives, environmental concerns, and improving oil efficiency.

The oil market will remain well supplied, even at lower prices. We believe incremental oil demand through 2020 can be met with rising output in Libya, Iraq and Iran. We expect production in Libya to return to the level prior to the civil war, adding at least 600,000 barrels a day to world supply. Big investments in Iraq’s oil industry should pay-off too with production rising an extra 1.5-2 million barrels a day over the next five years. We also believe the American-Iranian détente is serious, and that sooner or later both parties will agree to terms and reach a definitive agreement. This will eventually lead to more oil supply coming to the market from Iran, further depressing prices in the “new oil normal”. Iranian oil production has fallen from 4 million barrels a day in 2008 to 2.8 million today, which we would expect to fully recover once international relations normalize. In sum, we see the potential for supply to increase by nearly 4 million barrels a day at the lowest marginal cost, which should be enough to offset output cuts from marginal players in a sluggish world economy.

Our analysis leads us to conclude that the price of oil is unlikely to average $100 again for the remaining decade. We will use an oil rebound to gradually adjust our portfolio to reflect this new reality.

From 1976 to 2000, oil consolidated in a wide price range between $12 and $40. We think the next five years will see a similar trading range develop in oil with prices oscillating between $55 and $85. If the US dollar embarks on a mega uptrend (not our central view), then we can even see oil sustain a drop below $60 eventually.

Source: Bloomberg

Normally, falling oil prices would be expected to boost global growth. Ed Morse of Citigroup estimates lower oil prices provide a stimulus of as much as $1.1 trillion to global economies by lowering the cost of fuels and other commodities. Per-capita oil consumption in the US is among the highest in the world so the fall in energy prices raises purchasing power compared to most other major economies. The US consumer stands to benefit from cheaper heating oil and materially lower gasoline prices. It is estimated that the average household consumes 1,200 gallons of gasoline a year, which translates to annual savings of $120 for every 10-cent drop in the price of gasoline. According to Ethan Harris of Bank of America Merrill Lynch: “Consumers will likely respond quickly to the saving in energy costs. Many families live “hand to mouth”, spending whatever income is available. The Survey of Consumer Finances found that 47% of families had no savings in 2013, up from 44% in the more healthy 2004 economy. Over time, energy costs have become a much bigger part of budgets for low income families. In 2012, families with income below $50,000 spent an average of 21.4% of their income on energy. This is almost double the share in 2001, and it is almost triple the share for families with income above $50,000.” The “new oil normal” will see a wealth transfer from Middle East sovereigns (savers) to leveraged US consumers (spenders).

The consumer windfall from lower oil prices is more than offset by the loss to oil producers in our view. Even though the price of oil has plummeted, the cost of finding it has certainly not. The oil industry has moved into a higher-cost paradigm and continues to spend significantly more money every year without any meaningful growth in total production. Global crude-only output seems to have plateaud in the mid-70 million barrels a day range. The production capacity of 75% of the world’s oilfields is declining by around 6% per year, so the industry requires up to 4 million barrels per day of new capacity just to hold production steady. This has proven to be very difficult. Analysts at consulting firm EY estimate that out of the 163 upstream megaprojects currently being bankrolled (worth a combined $1.1 trillion), a majority are over budget and behind schedule.

Large energy companies are sitting on a great deal of cash which cushions the blow from a weak pricing environment in the short-term. It is still important to keep in mind, however, that most big oil projects have been planned around the notion that oil would stay above $100, which no longer seems likely. The Economist reports that: “The industry is cutting back on some megaprojects, particularly those in the Arctic region, deepwater prospects and others that present technical challenges. Shell recently said it would again delay its Alaska exploration project, thanks to a combination of regulatory hurdles and technological challenges. The $10 billion Rosebank project in Britain’s North Sea, a joint venture between Chevron of the United States and OMV of Austria, is on hold and set to stay that way unless prices recover. And BP says it is “reviewing” its plans for Mad Dog Phase 2, a deepwater exploration project in the Gulf of Mexico.  Statoil’s vast Johan Castberg project in the Barents Sea is in limbo as the Norwegian firm and its partners try to rein in spiralling costs; Statoil is expected to cut up to 1,500 jobs this year. And then there is Kazakhstan’s giant Kashagan project, which thanks to huge cost overruns, lengthy delays and weak oil prices may not be viable for years. Even before the latest fall in oil prices, Shell said its capital spending would be about 20% lower this year than last; Hess will spend about 15% less; and Exxon Mobil and Chevron are making cuts of 5-6%.”

About 1/3^rd of the S&P500 capex is done by the energy sector. Based on analysis by Steven Kopits of Douglas-Westwood: “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programs. Nearly half of the industry needs more than $120. The 4th quartile, where most US E&Ps cluster, needs $130 or more.”

As energy companies have gotten used to Brent averaging $110 for the last three years, we believe management teams will be very slow to adjust to the “new oil normal”. They will start by cutting capital spending (the quickest and easiest decision to take), then divesting non-core assets (as access to cheap financing becomes more difficult), and eventually, be forced to take write-downs on assets and projects that are no longer feasible. The whole adjustment process could take two years or longer, and will accelerate only once CEOs stop thinking the price of oil is going to go back up. A similar phenomenon happened in North America’s natural gas market a couple of years ago.

This has vast implications for America’s shale industry. The past five years have seen the budding energy renaissance attract billions of dollars in fixed investment and generate tens of thousands of high-paying jobs. The success of shale has been a major tailwind for the US economy, and its output has been a significant contributor to the improvement in the trade deficit. We believe a sustained drop in the price of oil will slow US shale investment and production growth rates. As much as 50% of shale oil is uneconomic at current prices, and the big unknown factor is the amount of debt that has been incurred by cashflow negative companies to develop resources which will soon become unprofitable at much lower prices (or once their hedges run out). Energy bonds make up nearly 16% of the $1.3 trillion junk bond market and the total debt of the US independent E&P sector is estimated at over $200 billion.

Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the US shale oil sector.” Even legendary oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.” This has happened once before. By the mid-1980’s, as oil output from Alaska’s North Slope and the North Sea came on line (combined production of around 5-6 million barrels a day), OPEC set off a price war to compete for market share. As a result, the price of oil sank from around $40 to just under $10 a barrel by 1986.

In the current cycle, though, prices will have to decline much further from current levels to curb new investment and discourage US production of shale oil. Most of the growth in shale is in lower-cost plays (Eagle Ford, Permian and the Bakken) and the breakeven point has been falling as productivity per well is improving and companies have refined their fracking techniques. The median North American shale development needs an oil price of $57 to breakeven today, compared to $70 last year according to research firm IHS

Source: WoodMackenzie, Barclays Research

While we don’t believe Saudi Arabia engineered the latest swoon in oil prices, it would be foolish not to expect them to take advantage of the new market reality. If we are entering a “new oil normal” where the oil price range may move structurally lower in the coming years, wouldn’t you want to maximise your profits today, when prices are still elevated? If, at the same time, you can drive out fringe production sources from the market, and tip the balance in MENA geopolitics (by hurting Russia and Iran), wouldn’t it be worth it? The Kingdom has a long history of using oil to meet political and economic ends.

We don’t see any signs of meaningful OPEC restraint at the group’s 166^th meeting on November 27^th in Vienna. The cartel has agreed to cut crude production only a handful of times in the past decade, with December 2008 being the most recent instance. Based on our assessment, the only members with enough flexibility to reduce oil output voluntarily are the United Arab Emirates, Kuwait and Saudi Arabia. OPEC countries have constructed their domestic policy based on the assumption that oil prices will remain perpetually high and most members are not in a strong enough financial position to take production offline. Once all the costs of subsidies and social programs are factored-in, most OPEC countries require oil above $100 to balance their budgets. This raises longer-run issues on the sustainability of the fiscal stance in a low-oil price environment. On the one hand, you have rising domestic oil consumption because there is no price discipline, which leaves less oil for the lucrative export market, and on the other hand, you require more money now than ever before to support generous budgetary spending.

How will this be resolved?

And with a much slower rate of petrodollar accumulation, what will be the implication for global financial markets, given the non-negligible retraction in liquidity?

The current oil decline has potentially cost OPEC $250 billion of its recent earnings of $1 trillion. Thus, it is not surprising to see OPEC production – relative to its 30 million barrels a day quota – rising from virtual compliance to one where the cartel is producing above its agreed production allocation. Output rose to 30.974 million barrels per day in October, a 14-month high led by gains in Iraq, Saudi Arabia and Libya. So, it can be grasped that the lower the price of oil falls, the greater the need to compensate for lower revenues with higher production, which paradoxically pushes oil prices even lower.

We believe the “new oil normal” will alter relative economic and political fortunes of most countries, with income redistributing from oil exporters (GCC, Russia) to oil importers (India, Turkey). We therefore exited our long position in the WisdomTree Middle East Dividend Fund (GULF) at a 14.4% gain.

Those nations with abundant oil tend to suffer from the “resource curse”. With no other ready sources of income, the non-oil economy atrophies due to the extraordinary wealth produced by the oil sector. OPEC countries are some of the least diversified economies in the world.

In an article titled “When The Petrodollars Run Out”, economist Daniel Altman wrote for the Foreign Policy magazine as follows: “Twenty countries depend on petroleum for at least half of their government revenue, and another 10 are between half and a quarter. These countries are clearly vulnerable to big changes in the price and quantity of oil and gas that they might sell…So what can these countries do to bolster themselves for the future? For one thing, they might try to use their petroleum revenues to diversify their economies. Yet there’s little precedent for that actually happening. In the three decades from 1983 to 2012, no country that ever got 20 percent of its GDP from oil and gas – according to the World Bank’s figures – substantially reduced those resources’ share of its economy. The shares typically rose and fell with prices; there were no long-term reductions.”

Source: Foreign Policy

Saudi Arabia appears to be comfortable with much lower oil prices for an extended period of time. The House of Saud is equipped with sufficient government assets to easily withstand three years at the current oil price by dipping into their $750 billion of net foreign assets. Saudi Arabia bolstered output by 100,000 barrels a day recently to 9.75 million, and cut its prices for Asian delivery for November – the fourth month in a row that it has cut official selling prices to shore up its global market share. With American imports from OPEC almost cut by half and given weak European demand, most oil-producing countries are now engaged in a price war in Asia. The Kingdom generates over 80% of its total revenue from oil sales so it may not remain immune in the “new oil normal” for long. According to HSBC research, Saudi Arabia would face a budget shortfall approaching 10% of GDP at $70 oil and at $50, the deficit could exceed 15% of GDP.

Russia and Saudi Arabia have opposing agendas in the Middle East. We believe Russia would like to see Middle East burn. This would shore up the cost of oil and keep America from geopolitically deleveraging from the region, thus allowing more room for Putin to outmaneuver his opponents in Europe. It was reported last year that the Saudis offered Russia a deal to carve up global oil and gas markets, but only if Russia stopped support of Syria’s Assad regime. No agreement was reached. It now seems the Saudis are turning to the oil market to affect an outcome.

With global energy prices at multi-year lows, Russia is facing a persistent low growth environment and an endemic outflow of capital. The $30 drop in the Brent price translates into an annual loss in crude oil revenues of over $100 billion. According to Lubomir Mitov, Russia’s financing gap has reached 3% of GDP, and they have to repay $150 billion in principal to foreign creditors over the next 12 months. Even with $400 billion in foreign currency reserves and the Russian central bank raising its official interest rate by 150 basis points to 9.5% last month, the ruble is down 38% from its June high making foreign liabilities a lot more onerous. As per Faisal Islam, political editor of Sky News, “financial markets have punished Russia far quicker than Western governments.”

“It took two years for crumbling oil prices to bring the Soviet Union to its knees in the mid-1980s, and another two years of stagnation to break the Bolshevik empire altogether…” writes Ambrose Evans-Pritchard in The Daily Telegraph. “…Russian ex-premier Yegor Gaidar famously dated the moment to September 1985, when Saudi Arabia stopped trying to defend the crude market, cranking up output instead.” It is estimated the Soviet Union lost $20 billion per year, money without which the country simply could not survive.

Could we see a repeat of events?

In the past, higher resource prices increased the occasions for military conflicts as nations would scramble to secure necessary supplies. Going forward, however, we firmly believe lower oil prices pose a greater risk of escalating current geopolitical challenges.

Putin is a determined and ambitious leader who wants to expand Russia’s power and influence. Since he rose to dominance in 1999, he advocated development of Russia’s resource sector to resurrect Russian wealth. In his doctoral thesis, he equated economic strength with geopolitical influence. Today, Russia needs an oil price in excess of $100 a barrel to support the state and preserve its national security. Consequently, there is no question Putin will try to resist lower oil prices either through outright warfare or more covert economic sabotage.

Russia is the world’s 8th-largest economy, but its military spending trails only the US and China. Putin increased the military budget 31% from 2008 to 2013, overtaking UK and Saudi Arabia, as reported by the International Institute of Strategic Studies. Russia also has plans to become the world’s largest arms exporter by more than tripling military exports by 2020 to $50 billion annually. We are convinced Putin would like to see a bull-market in international tensions. This is the biggest threat to our “new oil normal” theme.

Source: Cagle Cartoons

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/sfRldnzblv8/story01.htm Tyler Durden