BLACK PACIFIC CAPITAL

                       TACTICAL INVESTMENT MANAGEMENT

BlackPacific Capital

Blog

view:  full / summary

The Big Lie Part 3: Stuck in Purgatory

Posted on 1 February, 2017 at 22:29 Comments comments (2759)
Weekly Market Assessment
By:
The Big Lie Part 3: Stuck in Purgatory
 
"We are going to kill the companies (Fannie Mae, Freddie Mac), drive a stake through their hearts, we’re going to salt the Earth, so they can never grow back.” This is what one judge reviewing the case in the D.C. Court of Appeals, had to say about what the U.S. Treasury’s intentions are with respect to Fannie Mae. This quote from Judge Ginsburg best suits the current situation of what is happening to Fannie Mae in conservatorship! This perfectly explains what the polar opposite of conservatorship is supposed to accomplish. 
 
To say that Fannie Mae is a ward of the Government is an understatement and has been for 8 long years! In 2008, the world was on the brink of complete financial collapse. The backbone to the American economy lies in the housing market, and the biggest most misunderstood company at the heart of feeding this giant is Fannie Mae. So to avoid complete collapse, confidence had to be restored into these two giants and putting them into conservatorship was the solution.
 
Conservatorship is a legal process in which a person or entity is appointed to establish control and oversight of a company in order put it in a sound and solvent condition.  A conservator is the person or entity appointed to oversee the affairs of a company for the purpose of bringing the company back to financial health. It is supposed to be temporary and rehabilitative. Does “driving a stake through their hearts…so they never grow back,” sound like rehabilitative?
 
In July 2008, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA). HERA established the Federal Housing Finance Agency (FHFA) as ―an independent agency of the Federal Government to supervise and regulate Fannie Mae. Housing and Economic Recovery Act (HERA), entrusted FHFA to be the conservator of Fannie Mae. This was to ensure that there was a clear separation from Treasury (agency providing the bailout funds) and the regulated entity Fannie Mae (company receiving the funds)  
 
Below is a chart to give a quick view of the banks that received a bailout, numbers are in billions. Interesting to see that Fannie and Freddie have returned the most from the bailed out banks but still remain in Government control.  
 
 
Pursuant to the Governments Federal Housing Enterprises Financial Safety and Soundness Act, under the “Powers of the Conservator” the conservator or FHFA may take all actions necessary and appropriate to (1) put the Company in a sound and solvent condition and (2) carry on the Company’s business and preserve and conserve the assets and property of the Company. 
 
Now, knowing the above, how can one justify taking all of a company’s earnings and leaving them with basically nothing in retained earnings sound like a sound and solvent condition? The Government went a step further and titled the amendment "Full Income Sweep" now known as the Net Worth Sweep! How can anyone defend that a conservator is acting as a fiduciary to a company when they are sweeping all profits away from the company and into a government slush fund?
 
I will quote directly from the Governments rule book for conservatorships and receiverships: “The Safety and Soundness Act and HERA grant FHFA broad authority as Conservator to manage the conservatorship estate, including the authority to restrict capital distributions that would cause a regulated entity to become undercapitalized. As one of the primary objectives of conservatorship of a regulated entity would be restoring that regulated entity to a sound and solvent condition, allowing capital distributions to deplete the entity's conservatorship assets would be inconsistent with the agency's statutory goalsas they would result in removing capital at a time when the Conservator is charged with rehabilitating the regulated entity. Under the Safety and Soundness Act and HERA, FHFA has a statutory charge to work to restore a regulated entity in conservatorship to a sound and solvent condition, and to take any action authorized by this section, which FHFA determines to be in the best interests of the regulated entity or FHFA.” 
 
So if capital distributions would cause the regulated entities to become undercapitalized, then what would it mean if all the capital was taken in perpetuity? Also let’s not forget that the profits that the Government sweeps from Fannie Mae, do not go to pay down the $116 billion it got in the bailout. How can it ever emerge out of conservatorship with terms like this!  This is what makes the Net Worth Sweep so wrong and against all principals of being placed into conservatorship! It is the antithesis of soundness, solvency, preserving, conserving, rehabilitating which are all the things the statute requires a conservator to do!  How do you rehabilitate a company any way, if you are taking away all of their profits?
 
This is by far the most backwards thing to occur in capital markets and for that reason has attracted large institutional money managers, and hedge funds along with lawsuits contesting the legality of the Net Worth Sweep. There is not a single financial institution in the United States, let alone the two biggest, that are allowed to operate with zero capital. (David Thompson) This situation is not occurring to some small bank in the middle of nowhere, this is happening to the largest financial institution in the United States!
 
So why was the Net Worth Sweep enacted?  From here on it gets very interesting and a famous saying comes to mind that everyone as a child has heard before and for some reason politicians seem to have forgotten this early life lesson. It goes, "Oh what a tangled web we weave when we practice to deceive." The lies that have been fed to the public are finally being corrected and the story that is coming to light is much different than the original. The following assessments will materially show how the government is using Fannie Mae and Freddie Mac as piggy banks for the United States Treasury!  

The 500lb Gorilla in the Room

Posted on 21 October, 2016 at 13:05 Comments comments (121)
Weekly Market Assessment
By:
 
The Big Lie: The 500lb Gorilla in the Room


Fannie Mae is the 500 lb. gorilla in the mortgage business room.  For those unfamiliar, Fannie Mae also known as a GSE (Government Sponsored Enterprises) is a simple and straightforward insurance company. It is hands down one of the two largest financial institutions in the United States, with over $5 trillion in mortgages. No other major financial institution comes even slightly close to the scope and scale that Fannie Mae exerts in the secondary mortgage business.   They buy loans that banks and other lenders originate so those banks and lenders have the funds to issue new loans, enabling more people across the country to buy, refinance, or rent a home.  

Fannie Mae guarantees the timely payment of interest and principal on mortgage backed securities that are purchased by investors. Bruce Berkowitz, a legendary fund manager who is suing the government explains Fannie Mae here:  “They are not banks. There isn’t a local Fannie Mae branch on the street corner. Unlike the big banks, Fannie Mae did not commit any consumer fraud in the run-up to the financial crisis. The two do not originate mortgages and they do not deal directly with individual homeowners. However, when it comes to funding our nation’s housing market, Fannie Mae is mission critical. The company has helped tens of millions of American families buy, rent, or refinance a home’s even during the toughest economic times when banks and other lenders shun mortgage risk. Bottom line: Fannie Mae and Freddie Mac are the housing finance system in America, and earn a nominal amount (less than 40 basis points) for ensuring that the venerable 30-year fixed-rate mortgage remains widely accessible and affordable.”  

They provide the funding required for banks to make a loan, they buy pools of mortgages from banks and sell these bundled up mortgages to investors with a “government guarantee" on the principal and interest payment.  Fannie Mae is the 30 year mortgage and remains the bridge to the American dream of home ownership!   

What Happened to Fannie Mae

The story goes like this, in the fall of 2008, the world was coming to an end and teetering on the edge that would official destroy the world was Fannie Mae and Freddie Mac becoming insolvent.  To prevent this from happening the U.S. Treasury contracted a deal/bailout. The terms were dictated by the Treasury, the government provided Fannie Mae with $116 billion in funding for what is called Senior Preferred Stock Purchase Agreement (SPSPA) which carries a 10% dividend on its shares, complete control over the management and board, a senior liquidation preference along with warrants to purchase 79.9% of the Fannie Mae’s common stock for $0.00001 or around ~$40,000!  You read it right, a company just a year earlier was worth over $50 billion was essentially bought for $40,000. So under pressure from the government for fear of insolvency, Fannie Mae took the deal and was put into conservatorship and the world was saved from complete destruction, all thanks to the U.S. Taxpayer. 

Fast forward to 2012, where out of left field comes an amendment to the deal that has brought us to where we are today. It’s called the “Net Worth Sweep” or the “3 amendment”. What this amendment did was eliminate the original 10% dividend that was owned to the government on its preferred shares and replaced it with a complete 100% sweep of all profits to the United States Treasury that the company generated in perpetuity!  If you thought that was bad, which was basically a de facto nationalization of a private company, the amount the Government collects each quarter from Fannie Mae, not a penny is used to pay down the debt of the $116 billion provided by Treasury! Wow! So to this day, even though Fannie Mae has repaid $150 billion to the Treasury, Fannie Mae still owes $116 billion to the U.S. Treasury. How is this even possible or fair in the United States?  

What makes the timing of this Net Worth Sweep amendment even more interesting is up until 2012, Fannie Mae had been withdrawing funds from the Treasury to keep the company going. When in 2012, the tables turned and Fannie Mae was going to be extremely profitable for the foreseeable future. Coincidence, I think not and recent unsealed documents further back this up. The decision to funnel the profits into Treasury’s general fund came just months before Fannie Mae returned to profitability.  The housing market had recovered and certain paper assets which the Bush administration had ordered them to be written off four years earlier, regained value and under accounting rules, those values had to be put back on the books. To the tune of $50 billion dollars! Fannie Mae was back from the dead and was again making money, a lot of money. 

Where Are We Now…

To put it simply, nowhere! This is another gigantic example of how the Government works. Fannie Mae remains in conservatorship even eight years after the financial crisis and remains the last piece of the financial puzzle to close the book on the Great Recession. It operates at a profit with billions in net income but with no retained earnings and remains extremely undercapitalized, which means $0 capital to buffer against any future losses. That should scare everyone as Fannie Mae is the center of the housing market and has no protection in the case of something bad were to happen. It remains the first company in conservatorship history where the conservator Mel Watt who heads the FHFA is unable to end the conservatorship of Fannie Mae without the consent of the U.S. Treasury. This is another issue that will be addressed in the future.

 Fannie Mae and Freddie mac have repaid the government $130 billion more than what would have been paid to the Treasury had they not changed the terms of the "original bailout” deal. Clearly, Fannie Mae was not in a so called “death spiral” that the Government claimed, with returns like that.   The government continues to hold Fannie Mae captive while Congress tries to reform the housing model, while at the same time robbing them of all their profits forever and keeping the $116 billion in debt outstanding along with being completely undercapitalized with $0 capital to buffer against future losses.   If this doesn’t sound crazy to everyone, I don’t know what would in the financial world. Fannie Mae has clearly become nationalized; yes it can happen in the United States. All of this goes against the basic principles of a conservatorship. This of course has unleashed a wave of lawsuits against the Government that continue today, from accounting fraud to illegal takings claims, there remains 30 outstanding lawsuits today that will be discussed throughout these assessments.  This is a very brief overview of what has and continues to happen to the most important financial institutions in the United States!  
 

The Big Lie: Intro

Posted on 14 September, 2016 at 12:04 Comments comments (64)
The Big Lie: Intro

Tell a lie so big and enough times and it will never be questioned as anything but the truth.  Well, not in this case. Here is a story we have all come to known and believe as being the root cause of the financial crisis.  That tall tale we all have been told is that Fannie Mae caused the financial crisis in 2008.  The slightest question to almost anyone as to what they know about the recession or Fannie Mae, and their response will most likely be that they caused the Great Recession.  Job well done Government  and media!  Blame had to be placed and it landed on Fannie Mae to be the scapegoat. In the halls of Congress, most bureaucrats couldn’t stand the power Fannie Mae executives held and so when the opportunity came to bring them down, they didn’t miss the chance!
 
It is difficult to understand the financial instruments used to create the housing bubble, (like the “Big Short” explained) however that doesn’t and should absolutely not mean that blame rests on Fannie Mae, as it currently does in the court of public opinion.  What people should understand is that Fannie Mae is alive and thriving, while under complete Government control. Wow!  What has been completely lost through time is that people don’t know what is going on with Fannie Mae today.  So the lie will continue until we realize the importance of Fannie Mae and its current role in today’s housing market.
 
The story I’m going to tell is much different and more complex then what we have all been told. This story of course will not be remembered like the first since the original one has already clouded our judgement over time and convinced most as to what “really” happened.  Over the past four years, through lawsuits, legal discovery, unsealed documents, President Privilege records, and straight out lies, the true and real facts are starting to come to light as to what really happened to Fannie Mae in 2008 and especially in 2012. What is for sure is the following assessments are going to sound a lot different then what we were lead to believe about Fannie Mae.
 
The proverbial curtain is being pulled back and exposing the government of its wrongful taking of a private company, in a way that should scare anyone who holds money in the public markets. One so brazen that thousands of documents have been sealed under Presidential Communication Privileges, (I thought the Obama administration was going to be the most transparent administration in history?) in an attempt to withhold information that surrounds the Government’s wrongdoings.   I know it all sounds like a conspiracy theory already and I hate conspiracy theories but this one is going to be known as the “The Big Lie.”
 
The following assessments, like the “Oil Saga”, will be focusing strictly on Fannie Mae, since it is the larger of the two and one that most investors, including myself and my clients are invested in. The saying goes there is no reward without risk and by far the upside in the common shares of Fannie Mae far exceeds the risk to the downside.  

The Saga Continues; Big Risks and Little Spare Capacity

Posted on 29 February, 2016 at 0:07 Comments comments (109)
Weekly Market Assessment
By:
 
 
The Saga Continues: Big Risks and Little Spare Capacity  
 
In cases of emergencies, people have savings accounts to buffer the blow when something financially goes wrong. When there is a supply disruption in the oil industry, this savings account is called spare capacity. What is spare capacity and why is it important to the oil market? The EIA (Energy Information Administration) defines spare capacity as the volume of oil production that can be brought on within 30 days and sustained for at least 90 days. OPEC (Organization of Petroleum Exporting Countries) spare capacity provides an indicator of the world oil market's ability to respond to potential crises that reduce oil supplies. As a result, oil prices tend to incorporate a rising risk premium when OPEC spare capacity reaches low levels. Today, there is no risk premium in oil's price, while spare capacity is razor thin, and risks to oil supplies is at its highest!
 
  
 
So who should we believe when talking about the numbers regarding oil's spare capacity? Well unlike the demand assessment, where multiple parties disagreed whether there was demand or not, it is a much different story here. According to the EIA (Energy Information Administration) Saudi Arabia has usually kept more than 1.5-2 million barrels per day of spare capacity on hand for market management.
 
Andrew Hall, aka "God", goes onto say, "Today's surplus is only 2 percent higher (1.9 million barrels) than global oil consumption, and it will have dissipated by the end of the year, if not sooner." In his most recent letter to investors, he reiterates his spare capacity concerns, "One of the main drivers for a price jump could be that spare capacity had fallen to as little as 1 percent of global consumption just as there were rising risks of supply disruptions."  
 
Mike Rothman who has been attending OPEC meetings since the 1980's and runs a extremely well respected energy research firm comments on spare capacity. "Importantly global oil demand growth has significantly outrun additions to non-OPEC supply which, in turn, is a key reason OPEC's spare production has been withered down so dramatically."
 
Then there is Gary Ross, who is a leading authority on worldwide energy markets. He has run his firm PIRA Energy from its inception in 1976, building it into the leading international consultancy in energy market intelligence and analysis, currently retained by more than 500 companies across 60 countries.  This is what he had to say about spare capacity. "Last time they (Saudi Arabia) went for market share and pursued this type of philosophy back in 1985, you had ~10 million barrels per day of spare capacity. How much spare capacity do we have in the world today? 500,000 to 1,000,000 barrels per day and yet we have halved the price?! He adds “There’s not spare capacity to speak of instantly available,” Ross said. There are also growing geopolitical threats to supply, including from Islamic State."  
 
Emad Mostaque is a Strategist specialising in geopolitics, frontier markets and oil at Ecstrate. He says, "Spare capacity is at multi-year lows but geopolitical risk is the highest its been in a decade." 
 
Mike Beard of Hodges Capital management states, "I have never seen the oil price so weak when there is the potential for so much unrest."
 
"Oil markets are becoming dangerous with no grown-ups in charge. Spare capacity is wafer-thin, despite the glut, any upset could trigger an oil shock. It is a lot more dangerous than in the 1980s,” said Miswin Mahesh from Barclays. 
 
Finally, everyone can agree on one thing, that there is little spare capacity of just 1 to 2 million barrels or around just 1% of total oil demand.  
 
So why are people referring to the 1980's? During this period, OPEC members were supposed to meet production quotas in order to maintain price stability; however, many countries inflated their reserves to achieve higher quotas, cheated, or outright refused to accord with the quotas.  In 1985, the Saudis tired of this behavior, decided to punish the undisciplined OPEC countries. The Saudis abandoned their role as swing producer and began producing at full capacity, creating a "huge surplus that angered many of their colleagues in OPEC". High-cost oil production facilities became less or even not profitable. Oil prices as a result fell to as low as $7 per barrel. This is what the Saudis are doing today. However with no spare capacity to address potential and ongoing situations in the Middle East, that most likely will get worse, spare capacity has been forgotten for its importance to the oil market.   
 
How important is it to have spare capacity today? I'll start with the CIA Director John Brennan, he told a Senate committee last month that the violence and instability in the Middle East is the worst it's been in 50 years, painting a dire picture of a region he said was facing "unprecedented" bloodshed." Any other time in history with what is transpiring in this region would put oil over $100 a barrel, as violence in these areas poses a major threat to oil supplies.  
 First, we have the Yemen front, where the Houthi's which are backed by Iran (~2.8 Million barrels per day in production) are fighting against the Hadi's, which are backed by Saudi Arabia (~10.2 million barrels per day in production). So you have a proxy war going on in Yemen against two major world oil producers. This is of course occurring near one of the most critical chokepoints for the oil trade, Bab el-Mandab strait, where 3.8 million barrels of oil passes through this strait daily. Then look no further than to Syria and Iraq. Where the United States is leading two different coalitions carry out air strikes in Iraq and Syria, that have targeted ISIL. In Syria, Russia wants to keep Syrian President Bashar al-Assad in power and the United States wants him out. Russia and Iran are working together in this front while Saudi Arabia is aligned with the United States. Deja vu all over again as Iran and Saudi Arabia are at odds in another theater. As of last month, Reuters reported that Iranian backed militants played a key role on the ground as Russian jets intensified what rebels call a scorched earth policy. Recently the Saudis confirmed that they are wiling to send in ground forces into Syria, While just over a few weeks ago, the Head of the Iran''s Elite Revolutionary Guard was quoted as saying,"(The Saudis) have made such a claim but I don't think they are brave enough to do so ... Even if they send troops, they would be definitely defeated ... it would be suicide,” Jafari was quoted as saying. Wow! Ok, so what makes this worse is that recently Saudi Arabia (a majority Sunni country) cut ties completely with Iran (after a Saudi Embassy in Tehran, Iran was attacked after the Saudi's executed a Shiite cleric) and now Iran (a majority Shiite country) is publicly stating that if Saudi troops enter Syria it will be suicidal! Tensions couldn't be any higher and oil's spare capacity couldn't be any lower.Confusing and crazy that all of this is happening near the northern part of Iraq where some of Iraq's major oil fields reside, 4.3 million barrels a day in production. There are numerous oil pipelines, transportation hubs and oil fields all in this battle zone, where Russia, the U.S., France, Iran, Saudi Arabia, ISIL and the Kurds are all going at each other in one way or another. These are major oil producing countries that have an insane amounts of oil supplies that could potential be disrupted. If something "accidentally" happens like the downing of a Russian jet over Turkish territory could spell even more disaster, oh wait that actually happened!   
These are major proxy wars against conflicting political and religious Middle East countries and World powers, that no one is willing to admit is occurring. There has never been so much geopolitical turmoil in this region and still oil trades at depressed levels, as if none of this is happening. It's as if people forgot that around 41% of the global oil supplies comes from this region. All of this could cause a massive disruption in the supply of crude oil to the world, and if this disruption occurs, there is no spare capacity in terms of historic standards that could solve the problem. This would send crude oil prices sky high.  So the need for spare capacity in today's world is even more important because of the turmoil in the Middle East. Just look to recent events in Libya on January 6th 2016. A now failed state that is being taken over by ISIL. The picture below are what happened when ISIL attacked a Libyan Oil Field and blew up four oil storage tanks. Each tank held half a million barrels worth of crude oil. Smoke so large a thick you could see it from space. Click Here is an on the ground video on the tanks on fire.  Think that put a dent in crude oil floating around the world?  
As you can see in the map below what can happen to oil production once a government is overthrown.  A power vacuums opens up allowing conflict to explode without having an organized force to suppress it. Libya is just one recent example as ISIL is now making home in this failed state and over taking its oil fields and ports. Coalitions forces may have no choice soon to start bombing oil facilities in the region to cut off the financing for ISIL. This is why spare capacity is needed for circumstances just like this. Just look what has happened to oil production in Libya over the course of the last few years. I doubt it is going to get any better.  
 

 
 
 
 
Back in December, Russia entered into the Syrian conflict, soon after a Russia plane was downed on the Turkish border. This was one event the oil market was expecting, collateral damage was bound to occur as so many forces fighting in one arena. What came from this was a sudden news flash that Turkey may be blocking Russian ships at the Bosphorus Strait. This Strait of Bosphorus connects the Black Sea and the Mediterranean Sea. Around 2.9 million barrels per day travel through this strait, and The U.S. Energy Information Administration calls the strait “one of the world’s busiest chokepoints." Oil prices jumped 8% on this rumor.
 
These unforeseen events are endless and are now more likely to occur with so many geopolitical and escalating sectarian face offs between nations. Syria, Iraq, Yemen and now some recent reports of the U.S. bombing ISIL targets in Libya, who knows where the next military front may be. What makes this worse is the fact that all of this is occurring in region that the world relies on for oil. The world wont stop demanding oil and right now there is no end in sight to ending geopolitical tensions in the Middle East!  

 
There are endless chaotic situations that could put the global oil supply under extreme stress and the market has lost sight of the importance of spare capacity. The oil spigot in the Middle East are completely opened to flood the oil market to remove the high cost producers and regain market share.  The "so-called" oil risk premium is not factored in at current prices and the oil market is skating on thin ice when looking to the Middle East, where spare capacity is almost non-existent. Any geopolitical disruption and the market will be looking for quick oil, however that request will be met with a barrel of oil with a price tag much higher then current prices and so begins the vicious cycle all over again.     
 
Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.
 
 
BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here.
 
 New holdings and liquidated positions: I have opened a position in Amazon (AMZN) at $533.50. This was entered right near its 200 day simple moving average. It has been added to the Growth Fund after selling out of Under Armour (UA).        

 S&P 500 Return 
Week:1.23% 
Year to Date: -4.42%  

Year to Date: -7.99% 

Week: -2.17
Year to Date: 4.77% 

Week: -12.65%
Year to Date: -12.56%
 

They Say There Is A Lack In Demand

Posted on 1 February, 2016 at 19:48 Comments comments (94)
Weekly Market Assessment
By:
 
 
The Saga Continues: They Say There Is a Lack in Demand...
 
The cure for low oil prices is low oil prices! Over the course of my investing in oil and oil related stocks, many analyst, economist, investors and strategist have preached that there is "lack" in demand for crude oil. However, I have found many others that dispute this claim along with data that suggests something completely different. So, right out of the gate is a quote from the International Energy Agency (IEA), "World oil demand is growing at its fastest pace in five years, thanks to rebounding economic growth and low prices." Along with the IEA there are two other major organizations that the market looks to for forecasts and overall oil market outlook, the Energy Information Administration (EIA) and the almighty Organization of the Petroleum Exporting Countries, know as OPEC.  

So lets take a look at how accurate these three agencies demand forecasts have been over the years. "Since 2010 the EIA, IEA and OPEC have rarely been accurate in their short term forecasts of demand growth", a Wall Street Journal analysis found. In a December 2014 outlook, the EIA predicted oil demand would increase by 900,00 barrels a day in 2015. But in its latest revision, it said consumption increased by 1.4 million barrels a day this year (2015). Whoops!

To make matters even worse, on average, the three agencies in their December year ahead forecasts have missed their later assessment of actual consumption by 600,000 barrels a day since 2010, according to the Journals analyst. Can it get any better than that! Well, the EIA's demand forecast is the one used most by oil analyst on Wall Street as the basis for their own forecast. Wow, so the input data analyst use to make predictions and put out to the public is materially wrong!?

Now for the grand finale, which is my favorite and it comes directly from an employed Energy Information Administration (EIA) engineer. "If you're using the weekly production numbers to do trades on Wall Street, your dumb, said Gary Long, a petroleum engineer who compiles numbers for the EIA. This is not going to work out for you. Don't do that. We've actually had people call us and be very angry with us because they've lost a lot of money."  So the people who actually produce the most widely followed oil production data think that it is so unreliable that you are a fool to make any decision based off them. This has made me think that the whole world is in the dark as to the real time state of supply and demand in the oil markets. This is another reason why trading oil is and will always be the most difficult commodity to understand, let alone invest in.

"We pay a lot of money to these guys, I wish they'd get it right once in awhile," said Ian Taylor, Chief Executive of Vitol Group, the Worlds largest oil trader, at a conference this year. For these few reasons, looking to private firms helps paint a better picture of the oil market.           

Now putting those interesting facts and statements behind us, who do I look towards for some credible and reliable information about the oil market? Well, they have to be people or firms, that over the years been both long and short the market and have been extremely successful at it. A simple way to explain this is, they don't have an agenda to always be long or always be short the oil market. They have been able to see that the market is going to be undersupplied/oversupplied and have been right more often then wrong.  

First, I turn to the legend in the oil trading business, Andrew Hall, who oversees Astenbeck Capital's $4.3 billion in assets, of which all is in energy. He has been in the oil trading business for 30+ years. He has made his living by predicting oil markets and throughout this process has gotten ridiculously rich predicting where oil prices are going. Among oil traders, [Hall] is referred to as “God.” His most highly publicized accomplishment was predicting both the oil spike of 2008 and the subsequent crash. He personally made $100 million in each of 2007, 2008 and 2009 because of those calls. He had to take his 2009 profits in the form of an increased ownership stake in the firm he runs because President Obama wouldn’t allow his employer, Citigroup (which had accepted a huge taxpayer bailout), to cut him a check.

As of late 2014, Hall has exited all of his short oil positions and gone long. Some say he has three gears when picking a direction in the market; Long, longer and really long. I wonder what gear he is in now? He is betting that the oil market isn't as oversupplied as most analyst and agencies believe. He states, "Oil's collapse is sending demand in the U.S. and Asia on a tear' that will push prices up this year and into 2016. Demand in the U.S. is up over 600,000 barrels per day, or 3.4%. The latest four week average is 1 million barrels per day or 5.7 percent. Lower prices together with more people working translates into more demand for oil. Europe will see growth in demand for oil in 2015 for the first time in years. Demand growth in China during the the first half was higher year over year by almost 500,000 barrels per day or nearly 5%." 

Hall's research shows that the crude oil market is much closer to being balanced and "for gasoline, the market is almost certainly in deficit given the phenomenal demand growth in the U.S. and Asia. September's data shows gasoline demand in the U.S. grew 4.5% compared to a year earlier. Vehicle Miles Traveled (VMT) grew at a similar rate, while fleet efficiency fell for the first time in eight years as buyers switched to trucks and SUV's. In India (which Hall believes will surpass the growth of China) gasoline demand increased 14% in October with auto sales up by almost 22%. Apparent demand for gasoline in China grew by nearly 11% in October: SUV sales were up 60% year over year." 
   
 
When a colleague asked Hall about his current losing long position in oil, Hall goes onto say, "He hasn't betrayed any doubts about his analysis or his strategy, he's taking this the way he's taken every other dislocation in the oil markets, he absolutely thinks he's right!" Then he leaves us with some simple advice, "The virtual inevitability of higher prices down the road leads to a simple conclusion: now is not the time to exit the market."

One of Andrew Hall's right hand man is Steven Kopits of Prienga (short for Princeton Energy Advisors), who also believes, as shown from the charts above, that the market isn't as oversupplied as most think and believes that demand remains robust as shown by the Vehicles Miles Traveled (VMT) and the previous chart of the demand and supply difference.  He suggests through his research that 2016 will be much like 1986. "In that year OECD (Organization for Economic Co-Operation and Development, basically major developed counties that are outside of OPEC) demand soared by 5% in the second quarter alone- equal to a gain of more than 4 million barrels per day in global demand today. Demand is up sharply in India, Europe and even China. At some point, traders will take note that a huge supply deficit is forming in international markets."

Kopits goes onto to say that a supply shock could come as soon as the second half of 2016. The reason is simple he says, "Demand will rise due to the lower prices and supply of conventional oil production will fall by as much as 2.4 million barrels a day." So, are these two guys, who have over 30 years experience in predicting the oil markets direction crazy? I find it hard to believe that, it takes time to turn such a large ship, but once it's turned and heading in the right direction, there might not be a way of stopping it!   

Another man I follow is Dave Demshur, who is the CEO of Corelabatories. He comments on China's ever increasing appetite for crude oil. "China's July imports of 7.2 million barrels per day which was up 29% year over year and 11% year to date. So if we compare the amount of crude oil being used in China in 2015, it is up 12% compared to 9% in 2014, to only 4% the year before. So when we look at China, we have an economy that went from bicycles to automobiles. So we might be seeing some weakness in China but certainly on the demand side for crude oil and gasoline products, its never been higher!"

To follow up on China's demand, a Jefferies (a global investment banking firm) analyst goes onto show how the market is misunderstanding China's oil demand. "Chinese oil demand is quite robust, up 9.2 percent year over year as of August. In this case, lower oil prices have spurred demand; annual demand growth from January to August of this year (2015) totaled 5.7 percent; well above its rate of 1.6 percent in 2014. We believe the market is missing China's strengthening oil demand, just as it missed weakening demand three years ago...China is pulling a head fake, which we believe could whiplash prices."  

To help reaffirm this demand from China has continued, in a January 2016 Bloomberg article, with help from Energy Aspects and FGE, found that China may buy 8% more oil from overseas in 2016, taking average purchases to 7.2 million barrels per day.  In a preliminary Reuters calculation based on government figures showed record oil consumption of 10.32 million barrels per day in 2015, up 2.6 percent from 2014, defying slowing growth in the worlds second largest economy. So, for those who believe that there is a lack in demand in China, because of its recent stock market concerns may need to rethink their case on China's constant need for oil at these extremely low prices.   

David Pursell, who is a well respected energy analyst and managing director at Tudor Pickering Holt & Co. (Energy only firm with $1.5 billion in assets) has been calling for $85 oil by the middle of this year. He goes onto to say that, "Oil markets get tight really fast. India is going gangbusters, China is OK. In the U.S. think about 3% growth on 20 million barrels a day. That's a lot of growth." I think that India has been forgotten about and could be one of the catalysts on the demand side that many aren't counting on. According to the International Monetary Fund (IMF), "For the very first time, India's economic growth rate (of around 7.3% for the year ending in November) is set to overtake China. It also note that, with sustained growth in internal combustion engine vehicles, the consumption of both gasoline and diesel (which constitutes almost 73% of the total sales of petroleum products in India) has witnessed a sharp increase in this decade, with gasoline sales increased by 14.77% (highest growth in a decade) in 2015."

 
Even the IEA (International Energy Agency) has come out and recognized that India has seen oil demand hit a 10 year high. With demand being up over 800,000 barrels per day from just a year ago. So, one can seen that with a decline in production through the decline curve and lack in investment with a continued thirst for oil, from the worlds largest economies could balance the oil market alot faster than most think. If there is a disruption in the supply of oil in anyway, there is little spare capacity to help fill the gap.

Another great investor, know more for seeing the housing bubble expand and benefiting from its collapse is Kyle Bass. His firm Hayman Capital Management oversees $2.8 billion in assets, has acknowledged the opportunity in oil. "I think there is a massive opportunity in energy. The global margin of safety in energy is the lowest ever, he continued to explicate. Global oil demand stands at its highest level ever, at 96 million barrels a day.
"  
Lets get a view of the oil market from a man with boots on the ground in 85 countries, that is the CEO of Schlumberger, Paal Kibsgaard. This is what he said on their most recent conference call, "We still believe that the underlying balance of supply and demand continues to tighten, driven by solid growth in demand and by weakening supply, as the dramatic cuts in exploration and production are starting to take effect."
    
Ill leave my last quotes on demand from what I guess are two "reliable sources." The first comes from the EIA. "It's an art more than a science in many ways -that's economics, said Matt Perry, Senior Oil Market Analyst at the IEA, a Paris based group that monitors energy trends for industrialized nations. You have to make a lot of assumptions that could of course be wrong, be added, hopefully the errors sort of cancel each other out."  The last one comes from the Worlds largest oil trading firm mentioned earlier, Vitol, where CEO Ian Taylor says, "I think there's not been enough attention to be honest on what really happened in demand last year (2015)."  Ill let you figure out which one I consider a more reliable source.  

Who are we left to believe? Ill have to side with people who have their money on the line along with their clients money. Have we overshot to the downside, where the market is being pushed to new lows which further fuels the chant that the oil market is oversupplied? Time will tell, however those who say that there is a lack in demand may soon find themselves confused by the oil market's next move!           
 
Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.
 
 
BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here

New holdings and liquidated positions: Sold out of my Under Armour (UA) position in the Growth Fund alot sooner than I would have expected. I exited the position at $84.85 after entering the position at $67.50. I had a 25.70% gain, and now looking to add Amazon (AMZN) into the Growth Fund after a huge selloff after their recent earnings release.          
 S&P 500 Return 
Week:1.78% 
Year to Date: -4.81%

Year to Date: -8.73% 

Week: -6.23%
Year to Date: 7.40% 

Energy Fund Week: -6.73%
Year to Date: -6.73%

Oil Saga- Where Did All The Rigs Go?

Posted on 13 January, 2016 at 19:00 Comments comments (66)
Weekly Market Assessment
By:
 
 
The Saga Continues: Where Did All The Rigs Go?
 
Capital spending is in free fall, a decline curve that is never sleeping and now a complete collapse in the drilling rigs in the United States. So what do you need other than capital to make up for the loss in oil production? Drilling rigs of course. As I have mentioned in the previous assessments, the United States has over the course of five plus years, become the third largest oil producer in the World. All due to the new technology known as fracking. This has brought on new supply to the market of around 1 million new barrels each year over the last five years. That is almost unheard of when looking at other oil producing regions around the world. Leave it to U.S. innovation and its ability to revitalize and bring back to life the oil industry after being somewhat dormant for almost 20 years!     

In 2009, there was around 200 drilling rigs bringing oil to the surface. The amount of rigs being used exploded with the new technology and the new shale basins being discovered that could put the United States back on the World map as an oil producing country, and it did! By late 2014, the drilling rigs reached a peak, where just about 1,600 rigs spread across the nation actively drilling wells, an eight fold increase! This of course was accompanied by a 100% increase in oil being produced over the same period.  Everyone and their mother rushed back into the oil business to get a piece of the piece while prices were high and the slogan "drill baby drill" was born! However, like everything else in the world, what goes up will eventually fall victim to the laws of gravity and must come down. In this case, the amount of rigs being used has literally fallen right off a cliff and has gone back to levels witnessed in 2010.

 Below is the Baker Hughes North American Rotary Rig Count, which is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada, it has issued the rotary rig counts as a service to the petroleum industry since 1944.   

[Above shows the complete collapse in the U.S. drilling rigs (blue line) due to the oversupply of crude (red line) in the market]
 
Rig counts serves as a loose barometer of the health of the industry and the current rig count is 56% less then in late 2014. Looking at the three major oil basins in the U.S., the rigs in the Bakken are now down 65%, the Eagleford is down 40% and Permian Basin is down 59%.  I'll be shocked if oil production doesn't follow the collapse in the rig count. On Friday we lost another 34 rigs, which puts us down 945 rigs since this time last year and now there are currently 664 working rigs. The freefall in rigs looks to continue as oil has dropped to a new 12 year low and hit $29.92 a barrel.  
 
Andrew Hall, of Astenbeck Capital, who is referred to as "God" in the oil trading business has this to say about the decline in drilling rigs. "There is a significant lag time between laying down the rigs and production rolling over. Production peaked in June of last year and has since dropped by 500,000 barrels per day. The production in shale/tight oil production rolls over first." OPEC's not the only balance of the market.  The United States is back in the role of swing producer, a role it hasn't exerted in six decades. If the U.S. has become the swing producer, then a drop in production from U.S. drillers will put the market in balance and in a much faster fashion that comes with its ultra high decline rate and lack of drilling rigs to make up from the loss in production. 
 
In another statement about the decline in rig counts from David Demshur, who is the CEO of Core Laboratories. "In the second half of 2014 in the United States, we completed 19,000 wells. This year (2015), we are going to complete only 9,000 wells. This sear drop in the amount of drilling will have a significant impact on the amount of production coming out of the United States." How big is this production hole going to be, along with the decline rate and how long will it take to fill it, when the market realizes we are undersupplied? That is going to be the scary part, its not a matter of if, its a matter of when.  Emad Mostaque an oil strategist had this to say,"Supply is approaching the "Wile Coyote" moment, particularly in the U.S. where production could fall 1 million barrels per day versus expectations into the next year(2016) as lower drilling and spending catches up with the market."    
 
So, is the market reading this wrong or is their something else at play here, or are we just that oversupplied? Well, we also have to remember the oil market has never gone through this before. Meaning, since the fracking revolution reigned in on the oil industry, this will be the the first correction since new unconventional oil has come into the market. I want to quote Ed Morse of CitiGroup, who is the Head of Global Commodities Research and recently ranked one of the "36 Best Analyst on Wall Street" had this to say. "This is a new world that we have never been through. The first adjustment of the shale and unconventional oil production in its history and its something new." This something "new" could drop production in the U.S. alot faster than most think and with the lack of active rigs looking for and producing oil, gives us almost no wiggle room when oil is needed. This is where the term spare capacity comes in, which will discussed later.   
 
Knowing this, we have no idea how the oil market will respond. However looking at certain inputs such as the major cuts in capital spending, ultra high decline rates and now falling drilling rigs, should help paint a picture of a future oil market and most likely one with a much higher price tag attached to it.    
 
Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.
          
See What I'm Trading:You can now view all my real-time trades by following this link, BlackPacific Capital1. This new site shows my trades, in real time the minute they are bought and sold. Below you can also click on the stock symbols, trade strategy or prices which will lead you to this new site. The site offers a full risk/return profile and video detailing the strategy of the trade. Note: When looking at the option positions every contract equals 100 shares.     

 BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here
 
New holdings and liquidated positions:
 I have added Under Armour (UA) at $67.50 to the growth fund. It is not part of the returns below.            

S&P 500 Return 
Week: -5.62%
Year to Date: -5.62% 

Year to Date: -10.99% 

Week: -10.27%
Year to Date: 1.66%

Week: -12.04%
Year to Date: -12.04%
 

The Oil Saga- Running as Fast as You Can to Essentially Stay in Place

Posted on 31 December, 2015 at 14:00 Comments comments (26)
Weekly Market Assessment
By:
 
 
The Saga Continues: Running As Fast As You Can To Essentially Stay in Place
 
The almighty natural depletion and decline curve. This is the dilemma oil exploration and production companies drilling wells and especially unconventional wells in the the United States have to deal with. It goes like this- every major oil field has a natural decline curve, where oil production decreases over a specific amount of time due to the nature of the reservoir and the materials drillers put into the well to extract the oil. In the United States, tight shale basins have "ultra high depletion rates" which force oil companies to drill more wells to keep up with the lost production from the previous well. An endless cycle that costs tons of money to keep production coming online to satisfy demand. 

It's like running as fast as you can to essentially stay in place. A simple way to explain this, is that in the first year a well produces 1,000 barrels of of oil a day, by the end of that year it loses 70% of its production and now only produces 300 barrels a day! On my last assessment, I discussed the need for capital spending on current and future oil production. The reason for this, is that companies that work in tight oil shale basins using unconventional drilling techniques face a massive decline in oil production. To combat this curve they have to spend more and more money on future wells to just keep production flat! Crazy...right? I thought you just drill a hole in the ground and oil just endlessly flows to the surface. Crude production is a capital intensive undertaking, as well as being highly dependent upon massive amounts of debt sourced financing. If you take away the capital, production has no choice but to decline! 


Through advances in technology, unconventional drilling companies have reduced drilling days and brought on more wells to replace the loss in production from legacy wells. This of course has helped in bringing down the cost per well however this also has an impact on the oil production. Oil reservoirs are extremely temperamental. If too much oil is extracted too quickly or if the wrong types or amounts of secondary efforts are employed, the amount of oil that can be recovered from a field can be greatly reduced; this is known in the oil world as "damaging a reservoir." 
So its a double edge sword in the oil production business and many say this decline curve is the Achilles heel of unconventional drillers. Below are type curves that express how scary these curves are in terms of lost production. 

[Depicted above is the decline curves for two of the most prolific U.S. Shale Basins in the United States. Both show the massive decline in production in just 12 months. Wells in the Bakken producing 600 barrels per day only 12 months later end up producing 175 barrels per day]

So the obvious question is how much do they decline? Try ~70% decline in production over the course of one year! Year two is ~35%, year three is ~20% and the fourth year in oil production is cut by ~17%. I couldn't believe these figures and how no one was talking about how much production drops off in such a short period of time.
 
Now that we know the decline rate and production free-fall in the United States, how does this compare to the worldwide decline rates? According to Core Laboratories, which is the leader in providing technology for improving a wells production and operates in 50 countries located in every major oil-producing provinces, provides services to the world's major, national, and independent oil companies, the worldwide decline curve has increased. They state in their most recent conference call that the, "newly estimated net worldwide crude oil decline curve rate is 3.1%, up 60 basis points over earlier estimated worldwide crude oil decline curve rates of 2.5%." So we know there is an ultra high decline rate in tight shale basins, its also in conventional wells around  the world and increasing! Oil producers are constantly fighting this decline monster that never sleeps and takes billions of dollars to feed.   
 
David Demshur, Core Laboratories CEO, goes onto say, "applying the estimated 3.1% net crude oil production decline curve rate to current worldwide crude production of approximately 85 million barrels per day, means the planet will need to produce over 2.6 million barrels of new oil by this time next year or production will yet again fall internationally. To maintain current levels of production a year from now, the planet will need to produce 2.6 million new barrels, that's just not going to happen." The reason why... as I mentioned last assessment, the enormous decrease in capital spending by oil exploration and production companies. They simply cant afford to drill new wells or greenlight new projects because of the current price of crude is not economical! 
 
This worldwide decline rate of two plus million barrels is inline with current oversupply estimates mentioned by analysts.  Are the estimates wrong about the current oversupply of crude? Is the market being irrational about these decline rates and not factoring them in? I doubt it, however, like I have mentioned before, market sentiment plays a large part in commodities and prices tend to overshoot to the upside as well as to the downside.  Without more spending by oil producing companies, oil production will head into dire straits. If the market gets a hint of being undersupplied, it will be too late, as new production will not be able to enter the market in time to slow down consumption, this leaves only one lever for the market to pull, which is higher prices to slow demand!  

 Even the U.S. Energy Information Administration (EIA) has come out and admittedly expressed the production decline in U.S. shale basins. The EIA stated that "in a 2015 monthly drilling productivity report found that most of the 7 inland shale basins that account for nearly all of the domestic oil production growth between 2011-2014 are now in decline." We have to remember that over the course of 10 years, 100% of worldwide supply growth came from the United States and the Canadian Oil Sands. A decline in these two regions alone will either balance the market or most likely create an undersupplied market.  

 Andrew Hall, a legendary oil trader sums it up perfectly. "Now that these companies are reducing their capital expenditures, accompanied by ultra high decline curve rates and production declines are likely to accelerate. New projects in high cost resources plays are being postponed or cancelled. The impact from these decisions will not be felt before 2016 because of the long lead times involved. But that also means such lost production cannot be quickly recouped should the market need it!"  We cant fight this decline curve, all we can do is continue to find and invest in new oil fields to replace the ones that are being depleted. Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.
          

See What I'm Trading:You can now view all my real-time trades by following this link, BlackPacific Capital1. This new site shows my trades, in real time the minute they are bought and sold. Below you can also click on the stock symbols, trade strategy or prices which will lead you to this new site. The site offers a full risk/return profile and video detailing the strategy of the trade. Note: When looking at the option positions every contract equals 100 shares.     


 BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here
 
New holdings and liquidated positions:
 I have added EOG Resources to the Energy Fund at $70.75. It is not included in last weeks returns.          

S&P 500 Return 
Week: 2.52%
Year to Date: 0.32% 

Total Return Fund Return 
Week: -2.78%Year to Date: -2.46%

Week: 3.74%
Year to Date: 15.67% 

Week: 1.28%
Year to Date: 1.28%

The Oil Saga- CapEx

Posted on 22 December, 2015 at 12:20 Comments comments (37)
Weekly Market Assessment
By:
 
How long is oil going to trade at these depressed levels? This of course is the million dollar question that everyone right now wants to know. However, there are certain ingredients that go into creating the oil market balance or imbalance that might help answer this question. One of the first topics I want to discuss is capital expenditures, which are funds used by a companies to acquire or upgrade physical assets such as property, or equipment. It is often used to undertake new projects or investments by the firm. In oil exploration and production the capital needed to find and extract the commodity requires a ridiculous amount of money. Capital spending is the lifeblood to drilling companies ability to continue on their quest to pull more oil out of the ground. Cutting this creates a huge problem in the short term and of course an even larger problem in the long term, as an oversupplied crude market becomes under-invested which leads to an under-supplied oil market.

So what has helped cause this flush of new capital into the energy sector? The monetary policies of the great Federal Reserve of course. It's low interest rate policies helped fuel the industry with what seemed like endless funding at low rates never before seen. This helped the well oiled drilling machines continue on their quest to find and drill new wells that were needed to replace declining production in legacy wells. This caused the crude market to become oversupplied by what has been termed the North American Shale Revolution.

This unconventional drilling known as fracking, brought to the market an additional 4 or so million barrels per day over the past 5 years. Coincidence that this correlates to the Feds Quantitative Easing program that started around the same time? Unconventional shale basins, also known as tight oil has lead the United States to become the third largest oil producer in the world! Yes, that is true and many still can't believe that. However, it has come at a cost as now the crude market has collapsed on itself and many companies are suffering because the cost to produce a barrel of oil is more than the actual price of a barrel in some locations.

So, just how oversupplied is the crude oil market? The current estimated supply is around 97.6 million barrels per day compared to current demand around 95.4 million barrels per day. Now, this is constantly changing and being revised, because it is extremely difficult to measure both numbers and explains why investing in this commodity is one of the most difficult. Some argue that the market is not flooded with oil and believe the oversupply is just around 500,000 barrels, while others believe it's closer to 2 million barrels. Market sentiment also plays a big part as markets overshoot to the downside as well as to the upside. Amazing to see what a half a million barrels to two million barrels can do to a market that once traded at $104 and now trades in the low $30's. Imagine if the markets got a hint we were under-supplied!       

[depicted in the chart above, you can see CapEx for the world's largest oil producers has been expanding... however, CapEx is about to fall off a cliff, when this happens, can you imagine what oil production will do...]

How can this excess crude be put back in balance? Well, take away the funding and cut capital expenditures (capex). Today, both of these levers have been pulled. Banks have begun to stop lending and companies have slashed their capex budgets by more than 25%. This of course is what creates a major problem for future much needed oil production and why current oil prices are unsustainable. 

The annual worldwide demand for oil is 34 billion barrels, this requires billions of dollars to maintain the constant demand. According to Rystad Energy, a Norway energy consultant states, "that while the oil industry worldwide needs to replace 34 billion barrels of crude annually--equal to current consumption--investment decisions for only 8 billion barrels were made in 2015." Wow! The OPEC cartel along with every major investment firm and analyst confirms that worldwide capex has been cut by $200 billion this year and it looks like another $115 billion will be cut in 2016. The almost full stop in spending is going to catch up with us. If future exploration and production projects don't come online to fill the decline in production, while demand remains robust, the current price of crude will have no choice but to rise to incentivize producers to put drilling rigs back to work!    

So who is cutting capex? Every oil related company is, from major integrated oil companies like Shell and Exxon Mobil to some of the smallest exploration and production companies, no one has been able to dodge this bullet.  They have no choice but to cut capex to protect their balance sheets. Energy investment bank, Tudor Pickering Holt & Co. recently said, "roughly 150 oil and gas projects have been delayed or cancelled globally over the last 18 months, jeopardizing a combined 13 million barrels per day of future oil production." They go on to say, "that the deferred projects--which exclude U.S. shale -- hold some 125 billion barrels of oil."  

When the decision is made to reduce capital spending, then the obvious assumption is that production will be negatively affected. When and if the crude market becomes under supplied, it takes drilling rigs in the U.S around 4 months from the time the drill bit breaks the ground to the time oil starts flowing to the surface and in other regions it could take months or years to green-light a drilling project. The lag time between bringing oil to the market could become worse the longer we stay at these depressed levels. So it's not like turning on a switch and voila, excess oil in the tank. The scary part that makes it worse, is when fear enters the market that prices are going to rise, consumers react by what many industry watchers call "topping off the tank" occurs and the already under-supplied market becomes even more under-supplied. A vicious cycle that is only cured through rising oil prices!    

Will 2016 be the year oil recovers? Some industry watchers and even corporate CEO's are sounding the alarm bell saying, "in a few years there's a good chance the demand-supply ratio once again will be out of whack -but this time there will be too much demand for too little crude." This is not the first time we have been trading at prices this low and sooner rather than later the decisions the oil industry has been forced to make today are going to come back and haunt us tomorrow.           

 Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.          

See What I'm Trading:You can now view all my real-time trades by following this link, BlackPacific Capital1. This new site shows my trades, in real time the minute they are bought and sold. Below you can also click on the stock symbols, trade strategy or prices which will lead you to this new site. The site offers a full risk/return profile and video detailing the strategy of the trade. Note: When looking at the option positions every contract equals 100 shares.    

BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here
 
New holdings and liquidated positions: I have added BHP Billiton and Hess Corporation to the Energy Fund. I opened the BHP position at $24.25, while locking in a dividend yield at 10% and Hess Corp at $47.25 while locking in a dividend yield at 2%.         

S&P 500 Return 
Week: -0.039%
Year to Date: -1.62%

Year to Date: -4.34%

Week: 1.47%
Year to Date: 13.41%

Week:-7.41%
Year to Date:-7.41%

Oil Saga- Intro

Posted on 13 December, 2015 at 21:45 Comments comments (64)
Weekly Market Assessment
By:
 
Oil... the black blood that runs through the veins of our modern global energy system. It's the dominant source of energy however, its future supply is uncertain. In the coming weeks, I plan to focus my weekly assessments to one particular subject that has no doubt become extremely interesting, nerve racking and nevertheless important to me, crude oil.  I will look at supply and demand and the problems that come with trying to explain how difficult it is to measure the two. What is the current demand and what is the current supply? The "missing barrels" saga. The shale revolution and its impact on the global supply of crude. I will investigate major investors and analyst that have bet long or short on the crude market over the past 25+ years; geopolitics in the Middle East and trading routes that affect oil supplies, and how current oil prices affects the future drilling plans. I want to unravel the huge cut in capital expenditures by oil companies, the collapse in the international and domestic rig count and the phenomenon of oil decline rates. All of these topics and more should layout my case and hopefully, in a simplistic way, illustrate why I am buying oil stocks and more specifically, exploration and production companies or more commonly know as drilling companies. Crude oil has fallen to levels not seen since the recession in 2009 and seems to be approaching levels not seen since early 2004. In less than a year, crude has dropped from $104 a barrel to ~$36 a barrel. Like all other times in the past, crude falls off a cliff and then rebounds to new higher prices that were not expected by the market. Is this fall in oil different?

Let me keep it simple in answering such question...No! I have started another fund that is going to track energy and energy related stocks throughout the next year. Huge blue chip companies are on sale and CEO's have expressed that their dividends are safe. This provides an unbelievable opportunity to be able to capture yield in a low yield environment, which has been created by quantative easing and the Federal Reserve's low rate policy. Is there risk in investing in a stock that is directly correlated to a falling commodity, absolutely! However, unlike most other commodities this is a finite resource that is in constant decline and requires billions of dollars in investment to substitute the loses and for now, all major developed and underdeveloped countries need it to function. Have we reached a bottom? Many say yes while others say it's going to be lower for longer. One thing is for sure, the longer we remain at these extremely depressed levels, the higher the future price of oil will be due to the lack of current investment. As of recently, we have seen crude oil make new lows while energy specific stocks have not. This is a small sign of divergence. Nevertheless, it might be worth a look or two. So from here forward, I hope I can paint a bright and lively enough picture of my outlook on the oil market. I'm investing in the most hated sector in the market buuuuuut, one of the most important commodities in the world.                                

Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.          

See What I'm Trading:You can now view all my real-time trades by following this link, BlackPacific Capital1. This new site shows my trades, in real time the minute they are bought and sold. Below you can also click on the stock symbols, trade strategy or prices which will lead you to this new site. The site offers a full risk/return profile and video detailing the strategy of the trade. Note: When looking at the option positions every contract equals 100 shares.    

BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here

New holdings and liquidated positions: I am still looking for a stock to add to the Growth Fund after selling out of NetFlix. In the Total Return Fund, AIG paid out a dividend of $0.28 per share. I have opened two positions in the Energy Fund with an entry price in BP at $31.75, while locking in a dividend yield at 7.5% and ConocoPhillips at $49.50 and locking in a dividend at 6%.      

S&P 500 Return 
Week: -4.02%
Year to Date: -2.05% 

Year to Date: -3.32% 

Week: 4.34%
Year to Date: 7.59% 

Week:-2.87%
Year to Date:-2.87%  

It's All Bad...No Wait, It's All Good

Posted on 13 December, 2015 at 21:21 Comments comments (46)
Weekly Market Assessment
By:
 
It's all bad, no wait...its all good! This week was another example of how difficult it has been this year to trade in the equity markets. On Tuesday, we had a nice rally across the markets but come Wednesday and Thursday, we lose over 475 points on some negative ISM (Institute of Supply Management) numbers that showed a contraction in the manufacturing sector of the economy. However, come Friday and we rally 370 points on a positive employment report where some 211,000 jobs were created and the unemployment rate stood at 5%. Of course this further gives the Federal Reserve the greenlight on the maximum employment side to raise rates, however we all know what we are lacking...inflation.  So we are back in the black for the year and it looks like December is going to be another tough month in trying to decide the future direction of this market. We have the last monetary policy meeting for the year in two weeks, which will put to rest the talk of interest rates for this year and will open up a world of conversation after they have made their decision to raise rates or not. I don't see any major moves in the market and think we will remain flat for the rest of the year, making it a +/-1% gain for the year. Has the market moved away from having these double digits gains for the year? Or are we just taking a break trying to assess the situation in the markets before we continue on the path of least resistance?               

 Where will we go from here? Is it time to step to the sidelines and wait out the rest of the year and avoid any additional risk from the Federal Reserve? Usually two weeks into December, large investment firms and hedge funds will begin to liquidate positions and begin the process of looking into what next year has to bring and to make funds available for taxes. This brings added volatility to the market and individual stocks as these large positions are winded down. The VIX (volatility Index) remains at depressed levels which expresses stability in the market for the time being. The 10 Year Treasury Bond currently trades at 2.25%, which also expresses calm in the markets as no one is running for cover and safely in the all mighty Treasury Bonds. Could this all change in one week, scratch that even in one day, absolutely. We have seen this happen many times just in this past year. Is the market fooling us to move into riskier assets before it pulls the rug out from beneath us with an end of year rate hike? Or is it safe to jump in feeling warm and cozy that the market is on strong footing? This is of course the foundation to every investment decision, do I wait it out or do I take on the risk? One thing we know for sure is that over the past six years the decision to take on the risk has so far been the best decision. The secular bull market I believe will remain intact in the face and aftermath of an interest rate hike. So on that note, here is to the bull that continues to run!                      

Making the Watchlist: Below are the stocks that I will be looking at over the coming months.  I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them.  You will be able to see and follow their growth and/or decline. Chart links may be attached.         
 
See What I'm Trading:You can now view all my real-time trades by following this link, BlackPacific Capital1. This new site shows my trades, in real time the minute they are bought and sold. Below you can also click on the stock symbols, trade strategy or prices which will lead you to this new site. The site offers a full risk/return profile and video detailing the strategy of the trade. Note: When looking at the option positions every contract equals 100 shares.    

BlackPacific Capital has created three funds. The first is the Total Return Fund and the other is the Growth Fund. Both of these funds will be compared against the S&P 500. Both will hold a total of no more than five companies each. The Total Return Fund is a low turnover fund where every holding must have a dividend and be undervalued to its peers. The growth fund is made up of momentum high growth stocks where the turnover rate is much higher. Below are their Weekly and Year to Date returns. For more information and to see the holdings in each fund click here

 New holdings and liquidated positions: I have finally been able to add Exxon Mobil (XOM) to the Total Return Fund at $79 and locked in a yield of 3.6%.  I have also sold out of the position in Netflix (NFLX) at $129.75 for a total return on the position of 30.73%. I have also added Square(SQ) at $11.90 to the Growth Fund and have given up on opening a position in Tesla (TSLA).   

S&P 500 Return 
Week: 0.04%
Year to Date: 1.81% 

Year to Date: 2.45%

Week: 8.02%
Year to Date: 8.02% 

Rss_feed

0