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2 Cases of Ebola
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Not Holding Assets to Maturity
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The Federal Reserve is Clueless
This isn`t a new concept, the US Dollar has been strong before, and the Fed Funds Rate has been much higher. I swear these doves at the Fed are from this West Coast school of ‘Feel Good Liberalism’ at the expense of throwing all their economic principles out the window. These doves at the Federal Reserve are so left wing ideologues that they are basically risking the entire financial system, creating massive bubbles in most of all the bond markets that are going to end disastrously at this pace, all because of their social welfare mentality which is at the core of all of this ZIRP Nonsense.
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Over a year ago, Netflix CEO Reed Hasting got into trouble with the SEC when Netflix stock price spiked 21% after Hasting boasted on his Facebook page that Netflix monthly viewing exceeded 1 billion hours 3 weeks before the company's scheduled earnings release. At the time, we opined that
Ever since the collapse of Enron and Lehman Brothers, corporate executive behavior and communication has been under the microscope with increasing regulatory scrutiny. There’s a good reason why almost all Fortune 500 C-Suite executives are very cautious and tight-lipped when speaking to the public about anything with stock price moving potential ..... It is irresponsible for a CEO to announce something without all the facts and figures.
Well, apparently we might have been too harsh on Hasting. Bloomberg reported even more serious discrepancies rife in the U.S. shale industry (see also chart below from Bloomberg):
Sixty-two of 73 U.S. shale drillers reported one estimate [of oil and gas reserves] in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg.
|Chart Source: Bloomberg.om|
For example, Bloomberg cited Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher, while Goodrich Petroleum Corp. (GDP) was 19 times. Bloomberg also noted the number PXD told to potential investors has increased by 2 billion barrels a year in each of the last five years -- even as the proved reserves it files with the SEC have declined. Similarly, the investor presentation by Rice Energy (RICE) shows 2.7 billion barrels. Rice, which went public in January, reported 100 million barrels to the SEC in March, that's almost 27 times higher.
So in other words, these companies tell SEC one number, then can just turn around and inflate that number to whatever 'estimates' companies believe to be 'probable' and/or 'possible'. If you think executives would be held responsible for this kind of 'mis-communication', you would be wrong. Apparently it is legal and a common operational procedure as Bloomberg explains:
The SEC requires drillers to provide an annual accounting of how much oil and gas their properties will produce, a measurement called proved reserves, and company executives must certify that the reports are accurate.
No such rules apply to appraisals that drillers pitch to the public, sometimes called resource potential. In public presentations, unregulated estimates included wells that would lose money, prospects that have never been drilled, acreage that won’t be tapped for decades and projects whose likelihood of success is less than 10 percent ........
Many of the companies use their own variation of resource potential, often with little explanation of what the number includes, how long it will take to drill or how much it will cost. The average estimate of resource potential was 6.6 times higher than the proved reserves reported to the SEC, the data compiled by Bloomberg News show.
Meanwhile, Bloomberg quoted comments from two of the drillers. From the Chairman and CEO of Pioneer Natural Resources (PXD):
"Experienced investors know the difference between the two numbers........We’re owned 95 percent by institutions. Now the American public is going into the mutual funds, so they’re trusting what those institutions are doing in their homework.”
Here is the spokesperson of Marathon Oil chiming in:
Figures the company executives cite during presentations “are used in the capital allocation process, and are a standard tool the investment community understands and relies on in assessing a company’s performance and value,”
So this means Wall Street analysts model valuation, growth, and therefore stock recommendation based on 'estimate' that does not meet SEC reporting standards but thrown out by executives to pitch a better story of their stocks to the potential investors?
Honestly, it seems even worse than Enron's off-Balance Sheet Financing scheme. Ultimately, in the Enron aftermath, CEO Jeff Skilling is serving 14 years of a 24-year original sentence for misleading investors. Unfortunately, that precedent does not seem to have made as much impact one would think at least within the onshore E&P industry. In that regard, we totally agree with John Lee, a Petroleum Engineering professor at University of Houston:
If I were an ambulance-chasing lawyer, I’d get into this.
This 'over-optimism' also opens up a whole new can of worms as to the current projection of U.S. energy reserves and production. Is the U.S. really on its way to become energy self-sufficient as some may believe based on "resource potential"? We certainly hope U.S. government checks all supporting data and facts before lifting the crude oil export ban.
According to Bloomberg, investors poured $16.3 billion in the first seven months of the year into mutual funds and exchange-traded funds focused on energy companies. Our advise to retail investors - Do your homework and double triple facts-checking, if something sounds too good to be true, it usually is.
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Market participants may say that the Fed will raise rates mid-year in 2015, but they are speculating in bonds far out of touch with this reality. In other words, bond speculators just like any other speculators will push price as far as they can up until the last possible moment until they literally are forced out of the market by real fear of rate hikes, and the more dovish comments out of the Fed just reinforces this risky speculation.
Read More >>> Central Banks Biggest Concern Should Be Market Stability
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We Cannot Raise Rates Because…
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To say that the Federal Reserve is behind the curve is an understatement now that we have broken the 6% barrier, of course all the participants who want continued free money will point to all kinds of excuses for maintaining recession era rates to juice everything from stock buybacks to yield carry trades.
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Markets are so influenced by Central Bank liquidity that we have little confidence in what the actual ‘market prices’ are for many assets, we strategically take advantage of extreme mispricing’s relative to our models, i.e., the low hanging fruit, and get out of the market. I don`t want to hold anything these days!
Liquidity, Liquidity, Liquidity
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Solar energy has garnered quite a buzz lately as China is set to beef up its solar installation. Fundamentally, many energy forecast scenarios by numerous agencies suggest while renewable energy would enjoy a higher growth rate, fossil fuels would remain as a dominant global energy source. Nevertheless, as the old saying goes -- If you can't beat them, join them. This seems to be what's happening with at least one solar company.
CNBC reported that GlassPoint Solar landed a $53 million investment from Royal Dutch Shell and the sovereign investment fund of Oman for its enhanced oil recovery (EOR) technology. As the company's name suggests, GlassPoint's technology runs on solar power, which produces steam to help pump more fossil fuel from conventional crude oil plays.
According to CNBC, GlassPoint has been using this technique in Oman since 2012, and it helped the firm score more than double its initial funding. According to EIA data, Oman is the largest oil and natural gas producer in the Middle East that is not a member of OPEC, and that EOR techniques have helped Oman's oil production rebound from a multi-year decline in the early 2000s. Oman relies heavily on complex EOR process to extract more oil than traditional drilling—to boost production.
EOR is nothing new to the oil industry. With much of the world's 'easy oil' already recovered, more and more producers are turning to EOR for prospects of ultimately 30-60% more of the reservoir's original oil. CNBC quoted consulting firm Ernst and Young which estimated [oil] companies spend at least $5 billion annually on the [EOR] process, and the need for this type of methods to expand the efficiency of wells is particularly acute in places like Oman and Russia where oil fields are getting long in the tooth (see chart below also from CNBC).
|Graphic Source: CNBC.com|
According to CNBC, GlassPoint's CEO Rod MacGregor noted in an interview that "This application looks like the next step for solar." Take it at face value, this new niche solar technology indeed looks very promising as it could reduce oil projects environmental impact, replacing and conserving other energy source(s) used in the EOR process. This could become a tremendous growth area for the solar industry, and for companies with the expertise. But before everyone gets overly excited, keep in mind that ultimately, like any new technologies and methods, it will need to pass the number crunching test.
The CNBC article made no mention of the cost factor. EOR is already a very cost-intensive process. So given that (1) The economics of solar and other renewable energy is still a much debated issue among experts, and (2) the intermittent nature of solar, I think the most likely scenario is that the new solar drilling technology would be become part of, but not replacing the existing traditional methods. This would put a very different perspective on its growth prospect.
Before the jury is in, solar industry should have no problem getting funding from oil companies that are desperate to gain some kind of positive association with any renewable drilling project. In the meantime, whether this niche technology sector within the solar industry could lose support from the environmental cause due to the involvement with oil drilling is yet to be seen as well.
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