I’ve seen this quoted in the media, and it’s wrong. Not arguing with you b/c you post great stuff, I’m arguing with the junk I’ve seen written in the media in the last month. If you just look at operating costs, it’s true, but that is not how these investments work. These are very capital intensive investments and you need to look at the cash flows on a well-by-well basis.
At $8.5 million well costs, a 600Mboe EUR well (an average well there) in the Bakken has an after-tax IRR of 9% at WTI of $66/bbl (my modeling estimates). Lower-tier wells in the middle Bakken have 4% after-tax IRR’s (These #'s sync with what some companies have said) These are short-cycle investments where the majority of production is on the front-end of drilling, as decline rates are very high for shale wells (70% less production in the 2nd year vs. the 1st year). It’s the cash flows that matter, not income statement operating costs per boe. If you don’t believe me, look at the stock prices of marginal acreage holders in the Bakken…Oasis Petroleum, Whiting Petroleum…it’s no coincidence they are down 55-70% in the last 3 months . They are speculative investments at these prices b/c they can’t drill new economic wells in the majority of their acreage.
Also, in a lot of these shale plays, you’re not getting 100% oil. In the Bakken, it’s 85-90% oil, 5-10% NGL’s and 5% gas. In the Permian, you’re getting a lot less oil (only ~65% oil) and a lot more NGL’s and dry gas. Eagle Ford is hit or miss based on your acreage. All other liquids plays produce a lot of NGL’s and condensate – they aren’t getting oil in a lot of cases.
Also, netbacks to producers matters. The majority of producers in the Bakken are not getting WTI price for their oil – its so hard to get oil out of there. It’ll cost $7-8/bbl to get it to a refinery hundreds of miles away. $66/bbl of WTI is $58-59/bbl in North Dakota.
This price decline will result in lower well costs, which will really help b/c that’s an important part of the cash flow profile, and that’ll help drilling economics eventually for those that have access to the capital, but none of these wells are economic at $40/bbl (unless you’re EOG). I don’t care about income statement break-evens b/c these are short-cycle investments with very fast paybacks – companies aren’t looking at income statement operating costs for break evens when they make these investment decisions – if they are they’ll be out of business soon b/c that’s malinvestment plain and simple.
Raw Raw interesting remarks on the state of oil markets and pricing and I agree the the central driver is the aggressive supply by the gulf states and I would not be surprised at all if the US is willing to drive its fledgling shale industry off the cliff in pursuit of a “greater good” (making life miserable for Russia!).
I am still 75% invested in stocks - although I have shifted aggressively to major multinational and other international and high dividend in the last six months - but I still do believe there is life left in this market because the alternatives suck so much.
I have major concerns about the long term health of the US economy because the government has done its best to dismantle the american middle class and the historic engine of world growth (somehow the connection between jobs and consumption seems to have been lost)…consumption growth will clearly be shifting overseas and firms in a position to exploit that are best positioned.
Nonetheless in american capital markets continued investment in stocks is the best place to be if you subscibe to the story line of skewed wealth distribution…asset ownership is where you want to be! For those without access to alternative assets where else is the money to go?!?
Corrections will come and go, but if you stick the technical definition of a bear market (-20%), we’ve still got some wood to chop. Don’t get me wrong, valuations are stretched (which might mean a prolonged and/or severe bear market when it does come) when you condisder equity values as a % of GDP, but the yield curve is not yet inverted and there are a few strong supports buttressing it (US labor slack quickly diminishing, foreign funds seeking yield they can’t find in their own country/one big carry trade, etc…) until it does invert. That said, the road for price appreciation certainly is shorter and moving to income assets and lower beta might be prudent, but I don’t think pulling out all together is necessary. The 2s10s curve is, although at the lowest this year, still has 152 bps before it’s inverted. Even after the 1st hike you’ve got room before the start of a bear market.
I can’t say enough about the importance of the yield curve in anticipating recessions/bear markets. Not sure if you’ve got access to Bloomberg, but if you do download SPX levels, and then graph is against (USGG10Y-USGG2Y). It has accurately predicted (and likely precipitated) all but one recession in the last century.
Also, as an aside, If you want an interesting exercise, regress the S&P index value/GDP against future ten year compound annual price returns of the index. Rsq = .77, the model says the next 10 years should return about 1.5% on a price basis + dividend yield.
i try my best to not be the “this time it’s different” guy but in this case this time has to be different. with the 2yr yield at 0.65%, the 10 year would have to fall to less than 0.65% to invert, and probably lower as the 2yr would likely fall as the odds of a looming recession increase.
if you truly believe that a curve inversion is required for a recession to occur, then you must also believe that the Fed can prevent every potential recession as the current rate situation is 100% due to the Fed’s ZIRP. by your reasoning, so long as the Fed keeps the short-end of the curve at zero (or negative if it has to), it’s impossible for a recession to occur. the Fed has a poor track record at preventing recessions.
it’s only prudent to assume that with the 0-5 year rates virtually at zero, and forceably so by the Fed, that this indicator is no longer useful.
I’m sure it’s not impossible for a recession to happen with a positively sloped curve, but it’s only happend once (and just the curve was flat and the recession was very, very brief). Keep in mind that Yellen just said that three hikes are in the works so add 75 bps to the front end and subtract however much that kills inflation expectations out of the 10 year and you’re a whole lot closer. That said, the Fed’s job is not necessarily to prevent recessions, but to cool things down when they are hot and heat things up when they are cool.
^ until the point when rates are 0%, or -5% if you include QE, and you have little power left. maybe you’re right, maybe it will be the rate hike that kills the economy and the recession occurs after an inverted curve but this still assumes that the Fed has full control of the economy. this assumption is dangerous.
Reading some Security Analysis today and came across this quote/excerpt that I thought I’d share:
“Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Sir John Templeton
‘In good times, Wall Street permits the raising of debt and thereby the retirement of stock, leading to an acquisition boom. Euphoria in Wall Street’s debt-creation machine leads to a crash, and that is when the bankruptcy investor supplies fresh equity and retires debt, frequently at a discount.’
Where do you think we are on the sentiment spectrum? I feel the market was “maturing on optimism” in 2014, but seems to be taking a step backward to skepticism this year given the current/projected volatility. The increase in borrowing by companies to buy back shares (partly due to artificially low interest rates) though suggests we are in the “acquisition boom” phase and may lead to a crash.
Now, I know there are thousands of factors that affect market returns for a given year, but given the above generalizations in isolation, do you think we’re in for a high or low tide this year in the US/internationally?
I trade Europe & South Asia primarily and from where I’m sitting- I do not see a US lead pullback in the immediate future. I am expecting ~5% correction in EU indices before March options expiry (it’s a big one for us here). DAX is ~11k level and it’s just too much speculation going on atm - skew has been hammered quite strongly across the board, which is just not right given the greece/russia situation.
Not to mention Japan is still in play - if US stocks do retreat, my guess is it will be lead by Japan.
As for South Asia, India is a growth story, it’s a completely diff ball game there - I’m expecting some very nice LT opportunities to buy solid performers near june/july when fed raises rates. Lots of optimisim for India vs increasing pessimism for china.
All in all, this is not a year when I or any of my research/economics guys I’ve spoken to are comfortable classifying under either high or low tide category - all I can say is it will be a volatile year for sure. For 2016 however, I am expecting a low tide.
I think we’re in the early euphoria stage. Central banks won’t let the market tank, but this s–t cray. The US equity market is way out of hand. We’re at all-time high on a median valuation in small caps and the level of bad behavior and cheap money is unlike anything I have seen in the last 9 years. I think we go sideways until interest rates go up or Europe wets its pants but we’re definitely close to the top. Every marginal buyer is already in, there is no one left to push it a lot higher.
I can’t comment on the US stock market short-term but some € blue chips are definitely due for a short-term correction after dat first QE steroid injection. Just look at the graph of :
LVMH
Air Liquide
BASF
This short-term correction *could* be starting now, although I am not sure.
Generally I don’t give a shit about market timing and look at the medium-term (where is international money going say, for the next 12 months) and long-term (which companies will have appreciated the most when I retire in 30 years) .
Medium-term I see money leaving the US stock market and entering the € stock market this year (seems rather logical at this point : QE, exchange rates, valuations, oil & commodities level, EDIT ; and I forgot thge most important part which is the lack of alternatives). I am almost certain that 2015 will be a very good year for € Large-Caps and I hope that the cushion that is building now will be enough to withstand the next crash, because I won’t be selling.
Unless you plan to go 100% fixed income on day 1 of retirement, your time horizon is much longer than 30 years. A lot of people make the mistake of using retirement as term length. You will most likely live a few decades post retirement.
I’m going to go with my continuing assertion that we are in one of the great bull markets that will continue for many years.
I have no evidence to back this up! But my guess is every bit as good as most of the reasoning on the other side. People have been predicting, hyperinflation, market crashes, overvaluation leading to major corrections, and hellfire and damnation etc. since 2009. In every case they’ve been wrong. I feel many participants are bearish, just to make themselves feel “sensible”.
You make a good point about feeling “sensible” - definitely something that I do believe is holding back a lot of investors to get in right now. We would know a lot more when fed raises IR mid-year, that I think would go a loooong way in addressing those doubts. That said, I do not believe this bull market would last past 2016.
I just hope that the mega bull market won’t be followed by a mega bear market à la 1930’s that lasted forever.
Anyways, I will admit that I belong to the group that was super wrong in 2009. I remember making threads about hyperinflation, China dumping its treasuries, etc.