Pummeling Continues – This too Shall Pass
By: Tim McPartland,
The selloff in stocks continues as it appears no one wants to own energy related assets or any stock that is highly sensitive to a slowing global economy (what isn’t?). Certainly a bunch of the selling is asset managers wanting to ‘pretty up the books’ for the year end close, but we believe much more of it is a questioning of the veracity of the United States going it alone – one of the few global countries without a recession threat.
We have listened to the goofs on TV talk about how the U.S. was fine–insulated from the global slowing and on and on. This after for years saying “everything is global” and when “China sneezes everyone else catches a cold”. Honestly we get so tired of the bold faced bullshit you hear and read.
Even our well positioned 2014 Model is getting a daily whack because there is no place to hide really (except a small hole in the backyard) where one can earn a couple meager cents on their investment.
Now let’s get another issue resolved. When interest rates go down income assets increase in value. NO–sometimes they do and sometimes they don’t and some assets do and some assets don’t. Interest rates are tumbling like crazy and preferred stocks and exchange traded debt ARE NOT going up (when looked at as a universe) in value. We need to remember that markets will buy or sell any given asset based on fear and greed and all logic may go out the window. Do not generalize–observe what the market does and not what the bullshiters say.
Now lets do one more. Oil production in the U.S. will not fall for a year or more because there is so much drilling in the ‘pipeline’. You can guess what news network had an expert on today that said this. We call bullshit on that!! We have studied so many decline curves in the last 2 weeks and we do not find it believable that oil at the current price level will continue to be produced at levels higher than the current level. It is simple math. The decline curves are almost all constantly steep–we were studying declines last night and the company we were looking at (Gastar) was producing from wells that started in the 600 boe/day range that leveled off after a year at 125 or 150 boe/day. This is constant. Additionally, while most of the talk has been on shale drillers the hurt extends in a big way to deep and shallow water drillers who have huge costs. The cost of drilling in deep water makes shale drilling look like childs play. We predict we will see a fall in production in the U.S. starting around May, 2015 and will plan accordingly. It seems logical to us. We can see the decline curves on wells, we can see the balance sheets and income statements of producers, we can see that rig counts are already falling (some areas by bunches–like deep and shallow water drilling–some by less–such as North Dakota), we can see by sentiment that consumers are loving this cheap gasoline. We will be involved in investing somewhere in this space by the springtime. We though it would be the end of the year (2015) before the smoke started to clear in the energy patch–but maybe it is a bit sooner. No doubt that we will not touch upstream companies prior to spring we could munch on something early next year–maybe a refiner–maybe a pipeline. Some that have bottom fished already have been WAY too early–a financial disaster you might say. Piling into any upstream company 10 days ago means you have a giant loss right now. Remember that a 50% loss requires a 100% gain to get back to even. Have patience–this could be like shooting ducks on the pond in a few months as the shakeout starts up in earnest (upon revaluation of in the ground assets at $55/barrel instead of $90/barrel).