"If 47% is the final percentage for the quarter, it will mark the lowest percentage of companies reporting sales above estimates since Q1 2013 (also 47%). Since Q3 2008, the percentage of companies reporting sales above estimates has finished below 50% only 6 times," FactSet notes. In a world where buybacks are king and capex is now a four letter word in more ways than one, this is not surprising.
One must understand that the easy money via QE from the Fed and zero interest rates allowed many shale players to burn free cash flow while showing operationally net of capital expenditures (which were funded by cheap flowing monies via FED) cash generation. To be clear, that model is now broken as the era of free Fed money appears to waning as both QE, and soon, zero rates become a thing of the past. The cost of capital is no longer falling but is now rising through higher bond yields and/or lower stock prices. The madness that is occurring in financial markets on discounting these events despite very weak, almost recessionary economics, boggles the mind.
Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible. Saudi Arabia intends to keep oil prices low for as long as possible.
In recent weeks the sell side analysts who cover energy have become so complacent that they merely plug in the current strip prices into their earnings models for E&P companies. Not one, except Mike Rothman at Cornerstone Analytics, is questioning the “why?” or “how?” of what is occurring. The 200 or so players who effectively control the oil futures market have changed behavior and expectations as the oil price curve has collapsed. Prices from late 2016 into 2018 are essentially flat in the low to mid 60s, believe it or not, which would essentially bankrupt most of OPEC, US conventional oil, part of US shale and deep offshore drilling. So ask where is the oil going to come from? Yet the madness continues until investors realize E&P companies need a higher price to justify investments in the space.
The present oil price collapse is because of over-production of expensive tight oil. The collapse occurred because of the inability of the world market to support the cost of the new expensive oil supply from shale, oil sands and deep water. The problem is structural and systemic and firmly rooted in the irresponsible funding of under-performing U.S. tight oil companies since at least 2010. The first step to price recovery is the severing of capital supply to companies that could not fund their operations from cash flow when oil prices were more than $90 per barrel. If this does not happen, we could be in for a long period of low oil prices.
Thomas Jefferson is credited with the following sage advice, “The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.” And so it seems sometimes the answer is right in front of us all along and we just fail to see it.
Oil prices will remain subdued for the next 20 years. That comes from a new policy brief from Stanford economist Frank Wolak, who says that a series of phenomena – surging U.S. shale production, a weakening OPEC, the shale revolution spreading globally, efficiencies in drilling, and more natural gas substitution for oil – will combine to prevent oil prices from rising above $100 per barrel anytime soon.
How can it be? Services PMI was at 6-month highs. The Kansas City Fed Index tumbled to -4 in March (against expectations of +1) and was last below this level in Feb 2013. KC Fed has now missed for 6 of the last 8 months and the report is a disaster across the board. New orders plunged to -20 (2nd lowest print since Lehman), order backlogs imploded, average workweek collapsed to -17 (lowest since Lehman), and future capex expectations fell to a five-year low. As one respondent noted, "we do not see the economy as being as strong as a portrayed in the national media reports."
Janet Yellen noted that everything was awesome and that stocks were now slightly "on the high side" of their historical range. It appears no one showed her the Russell 2000 which has a valuation multiple of just about 90x LTM earnings (as reported by the 2000 companies which comprise the index, and which were certified as accurate by 4,000 CEOs and CFOs on penalty of jail time). The mystery of how the Fed remains so stubbornly bubble blind - just like it did during the dotcom and housing bubbles - is thus revealed. The self-evident reason is that the purported geniuses who comprise our monetary politburo drink the Wall Street Cool-Aid about forward ex-items EPS. The Fed is driving a two-ton bubble machine, but has no clue that it has become a financial death trap.
Spending cuts for oil-directed drilling have dominated first quarter 2015 energy news but rig counts for shale gas drilling are too high. Investors should pay attention to this growing problem. Bank of America fears sub-$2 gas prices now that winter heating worries are over. Low natural gas prices affect the economics for gas-rich oil production in the Eagle Ford Shale and Permian basin plays as well as for the shale gas plays. Meanwhile, an orgy of over-production is taking place in the Marcellus Shale... Investors should carefully examine why shale gas players have not reduced rig counts more. Continued drilling in the Marcellus will crush natural gas prices further.
"This time a year ago, the oil industry's biggest problem was finding a way to deal with the “retirement tsunami” about to crash down on it as older oilfield workers hung up their cork boots to enjoy freedom. Now, with oil prices still in the doldrums, many of those same workers are lucky to be hanging onto their jobs, while others have been booted from the payroll as an ugly wave of layoffs takes hold."
The oil jobs nightmare is in fact spreading like a cancer. Last year there was much banter from the Wall Street shysters and Bakkan shale oil experts about the true breakeven price for shale oil not being $80 (which is the truth) but actually being as low as $58 a barrel. They were spreading this lie in order to keep idiot investors buying the stocks and bonds of these fly by night shale oil companies. Well, we are now six months further down the line and Bakkan shale oil this morning is selling for $37 per barrel.
At 6.90, Empire State Manufacturing missed expectations of 8.00 (and dropped from the previous 6.9 print) for the 2nd weakest print in 11 months. While New Orders tumbled back into the red (and 16-month lows), average workweek and number of employees rose markedly (making this survey once again seem a total farce). "Hope" for the future improved (though remains lower than most of the last year's prints) but new order expectations, tech spend, and capex all plunged.
Doubting if the growth ahead of GM is now over, and the great post-bankruptcy "success story" is rapidly fading as the company has been pushed to resort to the kind of financial engineering which has pushed the S&P higher for all of 2014, and follows a record month of stock buyback announcements? Then doubt no more: moments ago GM announced it is authorizing an immediate $5 billion stock buyback, and plans to return all cash above a $20 billion floor to shareholders.