Oil continues to strength against massive supplies in the US.
"Oil inventories at Cushing reached 34.1 million barrels in the week ended April 16, less than one million barrels shy of a record, the U.S. Energy Information Administration said Wednesday. The extra oil has few outlets, with stockpiles across the Midwest at their highest in at least 20 years and refiners already producing enough fuel to further inflate gasoline and distillate inventories."
Supplies at the highest level in 20 years and oil is still above $80/barrell. Wow.
'"Oil prices have managed to remain above $80 a barrel largely due to strong demand out of China, which has exceeded expectations for economic growth over the last 18 months, even as U.S. oil demand has underperformed.
"The shift in the epicenter for demand continues to shift east of the Suez," wrote analysts with Barclays Capital.'
Yet this may not be the end of it. If the Chinese yuan increases, then oil could go even higher if their stimulus is maintained while the currency appreciates and thus the buying power of China increases.
Thursday, April 22, 2010
Short the runt PIIGS
This will be a drawn out process. But we can be sure that Greece will default in some form or fashion (i.e. restructuring). In the meantime, let's enjoy the instability and make some money shorting the national champions of the most at risk PIIGS.
A few of the facts:
*There is a run on the banks going on in Greece already, official or unofficial. Over 25% of deposits have already left the domestic banks.
* Only six people in Greece claimed income higher than 1m euros in 2008 (pervasive tax evasion)
* Greece has spent over 50 of the last 200 years in default (subprime, always)
* Greece has not had fiscal discipline in the last 10 years, why will that change in a major recession?
As for the short of Portugal Telecom and the national electric company (EDFPY.PK), the performance of the telecom and energy industries are tied to the economic health of the country.
Short NBG at $3.10 entered on 4/22
Short PT at 11.00 (limit order)
Short EDFPY.PK at $37 entered on 4/22
A few of the facts:
*There is a run on the banks going on in Greece already, official or unofficial. Over 25% of deposits have already left the domestic banks.
* Only six people in Greece claimed income higher than 1m euros in 2008 (pervasive tax evasion)
* Greece has spent over 50 of the last 200 years in default (subprime, always)
* Greece has not had fiscal discipline in the last 10 years, why will that change in a major recession?
As for the short of Portugal Telecom and the national electric company (EDFPY.PK), the performance of the telecom and energy industries are tied to the economic health of the country.
Short NBG at $3.10 entered on 4/22
Short PT at 11.00 (limit order)
Short EDFPY.PK at $37 entered on 4/22
Thursday, April 15, 2010
Going to school with Sallie Mae
Moral hazard is alive and well, why not make some money off of it? A great candidate is Sallie Mae.
Recent policy changes by the Federal government banned the private origination of Federal student loans, Sallie Mae's most profitable activity.
As a result, Sallie Mae has contended that it will need to layoff 2000 workers as it retools to be one of the four designated Federal student loan servicers.
This rebalance in revenue streams pales in comparison to the current liquidity issues facing Sallie Mae. In 2010 and 2011 Sallie Mae is facing a rollover of $11B in debt with only $6B in cash and a hostile credit market. In March Sallie Mae completed a new 1.5B 10-year offering at a horrific 8% fixed. Although this is horrific at first glance in comparison to their current lending rates (5.5% - 6%), since Federal loans often float with interest rates, a rate increase could make this offering cheap in comparison to the discount rate.
Bottom line, the author believes that the Federal Goverment will do whatever it takes to make sure Sallie Mae can rollover their debt. It is not in the interest of the Federal Government to have another major lender fall due to a lack of liquidity, and that has been the minimum criteria for applying moral hazard.
So what do we do? Buy Sallie Mae senior unsecured exchange traded debt (NYSE:JSM) yielding close to 8.3% ($18 price / $25 par) maturing 12/15/2043. Buy at the limit price - $17.50.
Recent policy changes by the Federal government banned the private origination of Federal student loans, Sallie Mae's most profitable activity.
As a result, Sallie Mae has contended that it will need to layoff 2000 workers as it retools to be one of the four designated Federal student loan servicers.
This rebalance in revenue streams pales in comparison to the current liquidity issues facing Sallie Mae. In 2010 and 2011 Sallie Mae is facing a rollover of $11B in debt with only $6B in cash and a hostile credit market. In March Sallie Mae completed a new 1.5B 10-year offering at a horrific 8% fixed. Although this is horrific at first glance in comparison to their current lending rates (5.5% - 6%), since Federal loans often float with interest rates, a rate increase could make this offering cheap in comparison to the discount rate.
Bottom line, the author believes that the Federal Goverment will do whatever it takes to make sure Sallie Mae can rollover their debt. It is not in the interest of the Federal Government to have another major lender fall due to a lack of liquidity, and that has been the minimum criteria for applying moral hazard.
So what do we do? Buy Sallie Mae senior unsecured exchange traded debt (NYSE:JSM) yielding close to 8.3% ($18 price / $25 par) maturing 12/15/2043. Buy at the limit price - $17.50.
Monday, March 29, 2010
Bank inflexibility may lead to government forced writedowns
Currently there is growing pressure to relieve homeowners by forcing the banks to reduce second mortgages on properties.
From the Wall Street Journal…
“Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages. Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding "immediate steps to write down second mortgages."
It appears that the banks enjoy the current lending environment but do not want to concede to rectify the burdens carried by underwater homeowners.
What I read in the bible this morning…
Proverbs 28:8
“ 8 He who increases his wealth by exorbitant interest
amasses it for another, who will be kind to the poor.”
The government may be the instrument that makes the banks recognize their losses and allows the house poor individual to shake free of their debts. But if that is done, the banks could face another major capital problem.
“Most first-lien home loans are held by the government-controlled mortgage companies Fannie Mae and Freddie Mac or by other investors in mortgage securities. By contrast, banks hold most of the seconds and other junior-lien mortgages. About $1.05 trillion of junior-lien home mortgages were outstanding as of Sept. 30, according to the Federal Reserve. Of those, $766.7 billion were held by commercial banks; most of the rest were owned by savings banks and credit unions.
If banks are forced to write down or write off large amounts of those second mortgages, many would suffer major dents in their capital. Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, said regulators may need to allow banks to recognize losses on second-lien loans over an extended period to avert a disastrous immediate hit to their capital.”
Even though the loss should be recognized immediately, the banks will continue to carry the loans above market prices until forced to do so. But something could go wrong with the bank's plan. This will be an interesting issue to watch over the next few months.
From the Wall Street Journal…
“Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages. Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding "immediate steps to write down second mortgages."
It appears that the banks enjoy the current lending environment but do not want to concede to rectify the burdens carried by underwater homeowners.
What I read in the bible this morning…
Proverbs 28:8
“ 8 He who increases his wealth by exorbitant interest
amasses it for another, who will be kind to the poor.”
The government may be the instrument that makes the banks recognize their losses and allows the house poor individual to shake free of their debts. But if that is done, the banks could face another major capital problem.
“Most first-lien home loans are held by the government-controlled mortgage companies Fannie Mae and Freddie Mac or by other investors in mortgage securities. By contrast, banks hold most of the seconds and other junior-lien mortgages. About $1.05 trillion of junior-lien home mortgages were outstanding as of Sept. 30, according to the Federal Reserve. Of those, $766.7 billion were held by commercial banks; most of the rest were owned by savings banks and credit unions.
If banks are forced to write down or write off large amounts of those second mortgages, many would suffer major dents in their capital. Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, said regulators may need to allow banks to recognize losses on second-lien loans over an extended period to avert a disastrous immediate hit to their capital.”
Even though the loss should be recognized immediately, the banks will continue to carry the loans above market prices until forced to do so. But something could go wrong with the bank's plan. This will be an interesting issue to watch over the next few months.
Friday, March 12, 2010
Time to hold your nose and jump into China???
The China market stinks of government induced economic growth. Since November 2008 I have been highly skeptical of the ability of the world's biggest exporter to sustain economic growth in the face of major declines in import in advanced economies. I was even skeptical that the China stimulus would even be able to solve their problems temporarily. Yet once again I have been proven wrong and see an undeniable trend...
"Chinese exports jumped 46% y/y in February 2010 to US$94.5 billion, after a 21% y/y gain in January. The move suggests that China’s export recovery continues, supported by global demand, but the pace of growth has slowed on a seasonally adjusted basis in early 2010. The 45% y/y climb in imports, reflects in part the revival of the processing trade in which components are imported for re-export as well as the sharp increase in commodity prices."
At the beginning of 2009 exports from China had dropped 20% yoy. With stimulus, exports jumped 45% from 2009 levels but that equates to a 16% increase over 2008 levels. That just returns the country to the growth course it assumed before the crisis began (approximately 7.8% annually).
So is it time to go long China? Probably not. There has been so much positive feedback to the people who have been holding shares of Chinese companies it is hard to see new buyers coming. That said, there has been very little decrease in the stimulative monetary policies of the Chinese government.
As noted in my previous post, oil consumption points to increased economic growth and more upside to the market. But I am not convinced. Nor am I adventurous enough to wade in treacherous waters. I may be missing a huge opportunity, but a penny saved is a penny earned.
"Chinese exports jumped 46% y/y in February 2010 to US$94.5 billion, after a 21% y/y gain in January. The move suggests that China’s export recovery continues, supported by global demand, but the pace of growth has slowed on a seasonally adjusted basis in early 2010. The 45% y/y climb in imports, reflects in part the revival of the processing trade in which components are imported for re-export as well as the sharp increase in commodity prices."
At the beginning of 2009 exports from China had dropped 20% yoy. With stimulus, exports jumped 45% from 2009 levels but that equates to a 16% increase over 2008 levels. That just returns the country to the growth course it assumed before the crisis began (approximately 7.8% annually).
So is it time to go long China? Probably not. There has been so much positive feedback to the people who have been holding shares of Chinese companies it is hard to see new buyers coming. That said, there has been very little decrease in the stimulative monetary policies of the Chinese government.
As noted in my previous post, oil consumption points to increased economic growth and more upside to the market. But I am not convinced. Nor am I adventurous enough to wade in treacherous waters. I may be missing a huge opportunity, but a penny saved is a penny earned.
Wednesday, February 24, 2010
Oil: Another China play
Some said it was the USD holding up the oil price. Now the USD has retraced to pre-crisis levels vs. other major currencies and the price of oil has not fallen.
As it turns out, China imports are a large catalyst in demand for crude oil.
“China’s growing reliance on seaborne crude oil imports will set the tone of the tanker market for the coming decade,” Poten said in a report to clients, quoted by Bloomberg. “China’s expanding middle class, strategic stockpiling and complex refining capacity ensure that it will continue to be a large ship, crude oil story.”
What is strange is that overall world demand is down, but since China is buying, prices are up. This is somewhat understandable because 50% of the oil futures contracts traded are for speculation. So it is a self feeding machine.
In any case, based on this information I will be looking for an acceptable exit point for my SCO position. I cannot invest with 80% confidence when I see I am fighting the Chinese stimulus investment in oil consumption. I will need to wait to see lending decline prior to taking such a position again.
"China’s crude oil imports may reach an all-time high this year as an economic recovery spurs demand for fuels, data from China National Petroleum Corp. showed on Feb. 4. The Chinese economy, which expanded at the fastest pace in the fourth quarter since 2007, will grow four times faster than the U.S. in 2010, the United Nations said in December.
As it turns out, China imports are a large catalyst in demand for crude oil.
“China’s growing reliance on seaborne crude oil imports will set the tone of the tanker market for the coming decade,” Poten said in a report to clients, quoted by Bloomberg. “China’s expanding middle class, strategic stockpiling and complex refining capacity ensure that it will continue to be a large ship, crude oil story.”
What is strange is that overall world demand is down, but since China is buying, prices are up. This is somewhat understandable because 50% of the oil futures contracts traded are for speculation. So it is a self feeding machine.
In any case, based on this information I will be looking for an acceptable exit point for my SCO position. I cannot invest with 80% confidence when I see I am fighting the Chinese stimulus investment in oil consumption. I will need to wait to see lending decline prior to taking such a position again.
"China’s crude oil imports may reach an all-time high this year as an economic recovery spurs demand for fuels, data from China National Petroleum Corp. showed on Feb. 4. The Chinese economy, which expanded at the fastest pace in the fourth quarter since 2007, will grow four times faster than the U.S. in 2010, the United Nations said in December.
Chinese charterers accounted for about 30 percent of VLCC spot fixture activity this year, up from below 5 percent a decade earlier, Poten said."
Turkcell on sale
Simple market thesis, find a wide moat, buy and hold. Easier said than done.
Turkcell, the #1 cell phone provider in Turkey is one such company. Beyond the huge domestic market share (57%) and wonderful dividend policy (50% of profits to shareholders), this company holds a huge economic moat. The mobile telecom market naturally requires huge capital investment, and thus the barriers to entry are huge. Also, as in most emerging economies, telecom companies are often partially privatized but still national champions of the current regime. Turkcell is no different. No one in Turkey wants Turkcell to fail.
Purchasing this stock with .79 cent dividend (5.1% yield at $15) does incur currency risk. But economy of Turkey has held up very well in the recent economic crisis and has even been marked for a rating upgrade by the major rating agencies.
Although a large part of Turkcell is already foreign owned, at some point in the future I could see a major multinational moving in and buying Turkcell to extend their geographical footprint. But for now, I am content with the high growth and high yield.
The author is long TKC at $15/share.
Turkcell, the #1 cell phone provider in Turkey is one such company. Beyond the huge domestic market share (57%) and wonderful dividend policy (50% of profits to shareholders), this company holds a huge economic moat. The mobile telecom market naturally requires huge capital investment, and thus the barriers to entry are huge. Also, as in most emerging economies, telecom companies are often partially privatized but still national champions of the current regime. Turkcell is no different. No one in Turkey wants Turkcell to fail.
Purchasing this stock with .79 cent dividend (5.1% yield at $15) does incur currency risk. But economy of Turkey has held up very well in the recent economic crisis and has even been marked for a rating upgrade by the major rating agencies.
Although a large part of Turkcell is already foreign owned, at some point in the future I could see a major multinational moving in and buying Turkcell to extend their geographical footprint. But for now, I am content with the high growth and high yield.
The author is long TKC at $15/share.
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