Archive - Dec 2014 - Story

For years, we've been warning that the economics of the US 'shale revolution' were suspect. Namely, that they've only been made possible by the new era of 'expensive' oil (an average oil price of between $80-$100 per barrel). We've argued that many players in the shale industry simply wouldn't be able to operate profitably at lower prices. Well, with oil prices now suddenly sub-$60 per barrel, we're about to find out. Using the traditional corporate income statement, it is difficult to determine if shale drilling companies make money. There are a lot of moving parts, some deliberate obfuscation at some companies, and the massive decline rates make analysis difficult – since so much of reported profitability depends on assumptions made regarding depreciation and depletion. So, can shale oil be profitable? If so, at what price? And under what conditions?

For those wondering where US shale exploration and production companies will be in about 2-3 years, look no further than the gold miners, where the disconnect between undaunted physical demand and relentless paper supply (after rebounding above 0%, GOFO is once again negative through the 3 month mark), and where high production costs and low selling prices, after two years of balance sheet pain, is finally leading many over the cliff. Case in point, Canadian gold-miner San Gold, which had a capitalization of over $1 billion in 2010 just filed for bankruptcy protection. It isn't the first gold-miner to wave the white flag, and it certainly won't be the last.

It is truly amazing to see the contortions into which some analysts twist themselves, trying to make the historical facts fit their economic models.

America's wealth gap - between middle-income and upper-income families - is at its widest on record. Guess when it started to surge...

If there is one thing the investing public has 'learned' in the last few years, it is 'no matter how bad the fundamentals, if it's been working, buy moar of it'. And so, it is with almost certain confidence that we should expect a resurgent flood of yield-chasing muppetry into no more egregious idiocy than the subprime-mortgage-debt market. As Bloomberg reports, the subprime-slime-backed securities that were created in the years before the financial crisis in 2008, which marked the last time they were issued, have gained almost 12% this year, or six times more than junk-rated corporate debt, according to Barclays. As one money 'manager' proclaims, "a lot of the uncertainty around the asset class has been taken away." Indeed, home prices will never go down ever again, right? (Just ignore this and this)

Wells Fargo Director/Senior Analyst James Spicer re-imagines Gloria Gaynor's Disco anthem for the High Yield E&P market... "At first I was afraid, I was petrified, When OPEC didn't cut and oil prices began to slide. But then I spent so many nights thinking how the Saudis did us wrong; And I grew strong - and I learned how to scrape along..."

As yields across the Treasury complex continue to rise this week - amid desks complaining of no liquidity at all (and following yesterday's weak auction) - the yield curve (5s30s) has collapsed to 108bps, its flattest since June 2008. 2s30s continues to slide also (at 212bps) almost eerily perfectly tracking the plunge in the curve of the early 2000s...

In a modification of the infamous Greedo scene from Star Wars, tonight's latest fatal shooting at a gas station in Berkeley, MO boils down to one thing: who threatened to shoot whom first. As a reminder, the local police department said that "the man had pointed a handgun at an officer who approached him and another man outside a gas station where the officer was conducting a routine business check in the suburb of Berkeley. Fearing for his life, the Berkeley Officer fired several shots, striking the subject, fatally wounding him." Moments ago, in order to quell further speculation, the St. Louis County Police just released a CCTV clip (shown below), highlighting the moments just before the fatal shooting which, indeed, appears to show the victim pointing a gun at the officer first, in which case this is nothing than a case of an officer engaging in self-defense.

If you have been watching (or reading) mainstream financial media, you would be entirely unaware of the fact that global investors have surged to Buy-The-F##king-Russian-Dip. Withe the plunge in US equities last week predicated on Russian instability, it appears the critical need to maintain the Santa Claus rally has pushed Russian stocks up a stunning 41% in the last 6 days (as the Ruble strengthened over 30%)...

"A world drowning in debt, weighed down with deflation,
Was saved once again by more asset inflation.
And I heard her exclaim, as she cranked up her press,
Wish your kids Merry Christmas, they'll inherit this mess!"

Having proclaimed the creation of jobs-jobs-jobs as his mandate when elected in 2012, Francois Hollande has so far overseen the loss of nearly 600,000 French jobs. At 3.488 million, French joblessness has never been higher (and French bond yields never lower) and has ben rising - practically unabated - for the 31 straight months since his 'raise taxes on the wealth' election (and 42 months straight overall). The cries for lower rates and Sovereign QE remain but, we ask in a desperate plea for sanity, what is it that QE-driven lower-rates will do going forward that they have utterly failed to do for the last three-and-a-half years?

"It was essential for our studio to release this movie, especially given the assault upon our business and our employees by those who wanted to stop free speech,"

SONY THE INTERVIEW TO STREAM FOR RENT AT 1:00 PM ET TODAY

"We chose the path of digital distribution first so as to reach as many people as possible on opening day, and we continue to seek other partners and platforms to further expand the release."

The oil price drop that has dominated the headlines in recent weeks has been framed almost exclusively in terms of oil market economics, with most media outlets blaming Saudi Arabia, through its OPEC Trojan horse, for driving down the price, thus causing serious damage to the world's major oil exporters – most notably Russia. While the market explanation is partially true, it is simplistic, and fails to address key geopolitical pressure points in the Middle East.

There was some concern that in today's ultra thin tape, there may just not be enough demand (or volume) to absorb the $29 billion in 7 Year paper that was to be auctioned off at 11:30am. That wasn't exactly the case, and moments ago the Treasury sold, almost without a glitch, CUSIP G87 due December 31, 2021 at a high yield of 2.125%, which was a 0.5 bps tail to the 2.12% When Issued moments before the auction. Some of the more notable features of today's auction: the Bid to Cover was 2.388, the lowest since 2.36 in November 2013, and while Direct Bidder interest tumbled, and at 5.92% of the final takedown was the lowest since February of 2011, this was more than offset by the Indirects (read Japan's GPIF and comparables), whose take down of 56.5% was the highest since the 64.2% from December 2010, when the yield was 2.83%, or 70 bps wider than today's auction.