The big issue facing common unit holders of Linn Energy is
the over-extended financial structure of the business, i.e. financial
leverage. While Linn Energy is well
hedged with favorable $90 oil derivative contracts for the next several years
of production, the reassessment of the value of its proven reserves is expected
to severely stress its financing capacity in the very near future. In addition, even with the hedge program, the
drop in oil price will still place a burden on cash flow to pay distributions while
continuing to maintain a steady capital expansion program. If drilling is constrained for any period of
time at Linn Energy, the current high oil production rate will decline rapidly given
the characteristics of the proven undeveloped reserves that Linn Energy owns (light
oil, high concentration of NGL and Natural Gas). The cost structure of the company makes the
oil production “cliff” a particularly onerous problem. Based on an assessment of the financial
position of the company contained in this article, investors should expect a
radical down-sizing, or even complete elimination of the $.24 monthly distribution
level which is currently a 28.76% yield.
Thursday, December 18, 2014
Linn Energy: A Shale Play Challenged at $55 Oil
Linn Energy (LINE) (LNCO) traded closed below $10 a unit on
December 15, 2014, marking both a 52 week low, and lows not experienced since
the December 2008 financial crisis.
During the 2008 crisis, oil reached a bottom in the $35 range, whereas
currently we are just reaching the $55 per barrel range. Why is the panic so much more acute today
than the time period politically labeled as the “Greatest Recession since the
Great Depression?” Are we entering an
even bigger Depression? That question I
may have an opinion, but will not attempt to answer in this article. What I will provide readers is a clear nuts
and bolts view of why there is a run on the Linn Energy units, and why as the
market approaches $55 oil per barrel on the front-end of the curve, the investor
sentiment is warranted.
Wednesday, November 5, 2014
SandRidge Permian Trust – Struck by the Saudi Oil Shock
On October 30th SandRidge Permian Trust (PER) announced its quarterly distribution for
production during the time period of June through August 2014. During the summer the energy market showed
high oil prices throughout that benefited the Permian Trust which has 86% its
production in crude oil. The spread
between WTI and WTS crude oil widened during the quarter causing a slight
decline in price level realized by the Trust.
The distribution announcement was greeted with a rally in
the market as the units traded up from $9.50 to $9.93 per unit on the day after
the press release. However, the
information released may not have been the primary factor in share price
movement during the day. On Halloween
the entire market experienced what is being reported by experts as a massive global shortcovering rally because of the announced changes in Japan monetary policy
and pension fund allocation. The unit
price movement in Permian Trust units in the five day period leading up to the
announcement was probably more indicative of the change in short-term sentiment
about the Trust units, rising from $9.00 to the most recent $9.93 closing price
on October 31st.
Thursday, October 30, 2014
Stocks Post QE3 - Pay Attention to this Data
For years the Fed Funds rate has been the sacred measure
that investors followed to determine if the Federal Reserve was promoting and
accommodative or restrictive policy. Fed
rate hikes were a signal that the market was a little too juiced on the punch,
and margin calls or a reduction in lending in the market was considered
prudent.
What about today? The
Fed Funds rate has been at 0% since December 2008 yielding the rate meaningless
in understanding just how Fed policy is influencing the financial markets, much
less the economy as a whole. I separate
the stock market from the economy because increasingly, and particularly since
the new Fed policy of using excessive amounts of QE as a tool in its policy,
the two have diverged in correlation. In
fact, from a pure numbers standpoint, it can be argued that over the last 6
years, Fed policy has been an outstanding success in pumping up the stock
market. Stocks have risen from the
depths of 666 on the S&P500 to over 2000.
Economic growth, however, has struggled to exceed 2% in real terms, and
3%-4% nominally.
The Fed has announced that it will now end for the
foreseeable future, its bond buying program known as QE3 in the market (the
program followed QE1 in early 2009 and QE2 in early 2011). Stocks went progressively higher with QE as a
backstop. With the QE program ending for
the time being, will the stock market suffer from the change? Logically given the correlation one might
suspect trouble; but what indicators should an investor monitor?
The answer to these questions is completely up to what
happens to the bubble the Fed has created on its balance sheet, and
correspondingly the high level of excess liquidity that it has created within
the U.S. banking system. One such
indicator that is likely to become useful in the post QE3 distorted financial
market is the level of excess reserves in the U.S. banking system. (Excess Reserves of Depository Institutions)
Tuesday, September 30, 2014
Investors Beware, U.S. Fiscal Spending Shift Coming
As we approach the 2014 mid-term elections, U.S. fiscal
policy is an economic headwind without any apparent current political movement
to change. The relatively tight policy
as measured by rate of growth is a counter inflationary force foremost, but also
potentially slows down economic growth. You can see the evidence that the present
fiscal policy is currently tight by reviewing the August 2014 year over year
fiscal expenditure growth rate compared to previous years when the stock market
peaked.
This data is surprising
to many investors because they are so accustomed to hearing how Washington is
out of control from a spending standpoint.
The data, however, is actually pointing in a different direction
presently.
Monday, September 22, 2014
Lending Activity Heats Up – Should Stock Investors Worry?
One aspect of the recent U.S. economic growth not
widely recognized is that it is being fueled by renewed high levels of debt
being taken on by consumers, businesses and investors. Unsustainable debt levels are notorious for derailing GDP
growth. This phenomenon was evident prior to the last two stock market peaks, and the risk has returned to the U.S. market once again.
If you review the statistics shown in the table below, you
will see that just like 2000 and 2007, debt levels in 2014 have risen to
warning zone levels relative to the size of the U.S economy (red = historically high, yellow =
approaching historical high levels).
Monday, September 15, 2014
Stocks Expensive, Force Building to Knock Bull Down
Many articles have been released in the media in recent
weeks concerning whether the stock market is over-valued or “very expensive”
and may be approaching a peak. One
highly regarded researcher is Robert Schiller, who in August of 2014 was interviewed
by many media outlets concerning the high level of the CAPE Ratio (cyclically
adjusted P/E) to give his views. Using
this analytical approach he notes, “The United States stock market looks very
expensive right now.”
I take a slightly different approach to look at the relative
value of stocks compared to historical norms, but reach the same conclusion as
Dr. Schiller. The analysis, as
summarized in the graph below, simply looks at the ratio of the traded value of
the DOW relative to the nominal GDP (stated in billions) during the same time
period. Most recently the U.S. nominal
GDP was just over $17.3 Trillion, and the DOW was trading at 17,098 at the end
of August giving a ratio of .98.
The ratio is functionally useful in highlighting periods
when the market is in outlier territory.
Presently, the stock market indices (DIA) (SPY) (QQQ) by relative
measure are expensive. However, history
has demonstrated stocks can trade at these levels for extended periods before a
steep correction occurs. Since the
1990s, expensive in relative terms is a necessary but not sufficient reason for
a major decline. Saying stocks are
expensive is different from trying to assess whether they are at a peak, and a
portfolio adjustment toward higher liquidity and lower risk is a good play.
What is the likelihood
that the S&P500 at 2000 is a peak?
Tuesday, September 9, 2014
Trend in U.S. Treasury Ownership Highlights Precarious Fed Rate Policy
Fed policy continues to be aggressively accommodative going
into year-end 2014, even as it is projecting a wind down of the massive $1.54T
QE program begun in January of 2013.
The easiest way to see
the market rate impact of the Fed’s QE program and ZIRP (zero interest rate)
policy is to review the current Treasury yield curve. As the above graph shows, the current yield
curve is
Thursday, June 5, 2014
Watch Out for the Stock Buy-Back Taper
Back in the year 2000 I got a call from a broker wanting me
to take a look at particular large cap financial stock. The pitch was “the company has lagged its
peer group, but it has announced a major share re-purchase program.” I asked what the company plans were for
growth. Awkward silence was evident on
the other end of the line. I then said, “So
you are asking me to buy-out certain shareholders who don’t want to own the
company anymore because the management team is struggling to find ways to
invest?” Needless to say, I did not
invest in the company. But I did follow
it. Sure enough it did rise in the
following months, only to be cut in half within the next 2 years.
I tell this story because I have always been wary of common
stock buy-back plans. Not because they
are all bad. Many companies have a
disciplined approach of returning capital through this process rather than
paying dividends. However, when the
buy-backs are not backed up by fundamental growth in the company, they turn
into little more than the company entering the debt market to finance
dividends, or worse, robbing from needed capital investment to maintain future
cash flow.
Tuesday, May 27, 2014
Quantitative Easing – Is it Inflationary or Deflationary?
On May 15, 2014 the CPI index was published in the U.S.
which showed general price increases as measured by the BLS were a meager 2%
annually. This was after a year of
massive bond buying by the Federal Reserve.
During the same year over year period, the Fed added $1.162 Trillion
dollars of liquidity into the worldwide economy.
What exactly is going on? The population has been led to believe that when the Federal Reserve “prints” money, the economic result is inflation. Chances are that the current path taken will result in a similar outcome. However, if you are looking at the present financial market and believe the Fed may have found the Golden bullet on how to tame inflation – simply lower interest rates to zero percent and flood the market with cash – think again. Why? It is actually very simple. It depends on where all the cash, goes. And eventually, the Fed is not in total control of where the excess money goes.
What exactly is going on? The population has been led to believe that when the Federal Reserve “prints” money, the economic result is inflation. Chances are that the current path taken will result in a similar outcome. However, if you are looking at the present financial market and believe the Fed may have found the Golden bullet on how to tame inflation – simply lower interest rates to zero percent and flood the market with cash – think again. Why? It is actually very simple. It depends on where all the cash, goes. And eventually, the Fed is not in total control of where the excess money goes.
Monday, May 19, 2014
Nervous Investors Move to Bonds just like Belgium?
I have run across data that belongs in the category of
strange and unusual in the May 15th publication of the TIC data (Treasury
International Capital Report).
The strange aspect of the data is that in the published
figures, the tiny country of Belgium with a GDP of only $509B, somehow managed
to purchase $40.2B in Treasury securities in the month of March. The purchases follow a six month barrage of
purchases by Belgium in which $214.6B in Treasuries were added to security
accounts held in the country. Based on
the data, Belgium has escalated to third, behind only Japan and China
(mainland) in the rankings of foreign countries which hold the most U.S.
Treasury reserves.
Wednesday, May 14, 2014
Theory of Financial Relativity: Powerful New Book Helps Protect Investments, Exposing Framework for Predicting Market Trends.
Masterfully
crafted by investment guru Daniel Moore, ‘Theory of Financial Relativity’
explains why financial markets suddenly change course and how these changes can
be predicted. By meticulously studying U.S. financial markets from WWII to the
present day, Moore has uncovered fourteen market corrections that display a
predictable pattern of change. Sharing this information with the public for the
first time, Moore’s work is poised to help millions protect their investments
and take advantage of their movements for success.
For
Immediate Release
Durham,
NC
–Both
consumers and critics traditionally treat U.S. financial markets as a volatile
and unpredictable world that could drastically change direction at a moment’s
notice. While this theory holds a shred of truth, a powerful new book exposes
the previously unknown and systematic pattern of ‘ups and downs’ that can
actually help investors predict when a bull will become a bear.
Everything
is showcased in ‘Theory of Financial Relativity’ by Daniel Moore. Hailed as
“the most interesting man in the financial world,” Moore has spent hundreds of
hours combing over seventy years worth of market trends to expose a
game-changing and predictable pattern.
Read more >>
Read more >>
Wednesday, May 7, 2014
Fed Cornered by QE Program – Reverse Repo Path Being Considered
In Fed Chair Janet Yellen’s testimony to the Senate Banking
committee on May 7, 2014 there were many questions about when the Fed would “normalize”
its interest rate policy, specifically the Fed Funds rate. She stuck to the party line, saying it is expected
to be a “considerable time” before the Fed will raise short term interest
rates. When pressed for a definition of “considerable”,
she did a political dance and left the definition to “it depends on
economic circumstances”. In other words,
it depends on what will do the least amount of damage to the political party in
charge.
One path to actually raise interest rates, but escape the
consequences that raising the Fed Funds rate entails, is to use a technique known
as the Reverse Repo. The "experiment"
that the Fed is currently actively
Tuesday, May 6, 2014
Market Winds are Shifting – Time to Assess the Signals
On Friday, May 2nd the
April
jobs report was published by the U.S. Bureau of Labor Statistics showing that
288,000 new non-farm payroll jobs were created in the month.
It was the
strongest month to
month growth since
January of 2012.
In addition the
unemployment rate fell
to 6.3%, with
138.252 million people
estimated to be
employed during the
month. This is
the highest total
number of employed
people since March
of 2008 and is on the verge of becoming an all-time high in terms of total employment.
The information was published a day after both the DOW and S&P500 (DIA) (SPY) set new all-time highs. The
immediate response by
the market when
the jobs information
was released was
a jump higher.
However, by mid-day the market was slightly down, seemingly unimpressed by
the job figures,
and ended the
day on a down tick. Why?
Research has shown
that while jobs
are of course
an important economic
indicator, they are
always a trailing
indicator. Anyone trading stocks on the jobs report is searching for fool’s gold. The more important aspect of the jobs report is whether the data causes an unexpected
change in the
expected direction of
market influential factors
that do impact
stock valuations.
Thursday, April 10, 2014
Emerging Market Debt Options to Hedge Fed Taper and Stock Volatility
Managing money in the current financial market is beginning
to resemble the game of musical chairs I played years ago in grade school.
Last year, at virtually the same moment in the year, the market “forces”
decided that the music would stop and the debt market, primarily the longer
duration bond market as well as high dividend paying stocks such as utilities (VPU), telecom (VZ) (T) and REITs (VNQ), would not have a
seat at the table. Municipal bonds (MUB) last summer were also ostracized
from the game, with the fears of bankruptcies in Detroit and Puerto Rico
looming large and investors warned to stay away as the market was far too risky
for entry.
Since the beginning of 2014, however, the music has been noticeably different.
Read more >>
The T-Bond (TLT) (TLH) (IEF) route moved the
10 year from around 2% in early 2013 to a high touching 3% precisely at year
end. The longer duration securities such as the 30 year also traded down
in value, up in yield in 2013, about 90 basis points to end the year at almost
4%. All the related interest-sensitive markets were beaten into
submission going into year end. Opportunities for savvy income investors
were plentiful – for a brief moment.
Market Dancing to a Different Tune in 2014
Since the beginning of 2014, however, the music has been noticeably different.
Read more >>
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