Tag Archives: Macro

Intervention ahead

Energy, On the cover, Sin categoría,

“The most dangerous words in the English language are: I am from the government and I come here to help” (Ronald Reagan).

It is starting to get scary. Politicians all over the world are congratulating themselves for tackling the crisis (a debt and gearing crisis) with more debt and more gearing. Threatening banks to intervene if they don’t lend, threatening companies to intervene if they don’t lower prices below their cost of production, threatening hedge funds for using shorts to hedge long positions, threatening to  close borders to save domestic industries. Nice.
The stock market falls again in January and hedge funds are to blame again (de-leveraging and sell-out of long-only funds never was a problem)…. As if banning shorts helped the market in any way.
It is easy. Governments have found in this crisis the perfect storm to do what they always wanted to  do and found difficult: intervene everywhere, regulate to death. And that would not be a problem if the governments and their advisers had constructive solutions and were made accountable and audited. But as a recent cartoon stated, we are bailing out the iceberg to save the Titanic. Governments have created this crisis by giving mass incentives for companies to grow beyond normal levels of debt (in many cases, like in Spain, to fulfill egotistical empire-building desires), by allowing abnormal lending to people that could not afford it, by massively increasing public expenditure and promoting “high growth” industries like construction and subsidy-driven energies. Debt was solved with more debt and now it is expected to be solved with more debt, more money printing and, icing on the cake, government intervention. So who takes care of the revenue problem? You and I and the poor companies that actually made money and good returns without gearing themselves to death.
Wait a minute, so in order to bail out the auto industry, the over geared renewable energy sector, the banks and the construction companies the perfect solution is to tax the oil and gas sector (20% net debt to  equity average) and tax the population to cover the opex of the ever increasing government?. Who is going to invest? Who is going to take the risk of being entrepreneurial if the solution is to subsidise unsuccessful irresponsible management by taxing successful business models?. Why do we have to  save jobs in the auto industry and not save any in small businesses and new enterprises?.
Remember, “a government that is big enough to solve your problems is also big enough to create them”. More and more countries (particularly in Europe) are constantly brainwashing the population into believing that the ones (the Governments) that caused the problems will solve them, and gradually asking them to “let go” of their economic and deciding freedom to “allow the government to undertake the necessary actions”. Obviously, they are not to be monitored or controlled, they are not held responsible for what they do with your (our) money. They just want you to trust that in the end everything will be alright. If it is, the economy will be driven by semi-state owned oligopolies that drown any entrepreneurial  opportunity, if it’s not, the world leaders will shrug off the blame and point at someone else. Pity that hedge funds might not be there to lay the blame. Next task: find the scapegoat. It’s urgent. Suggestions welcome.

Tough times for equities

Energy, Oil Market, On the cover,
After years of solid performance, equities are a risk, more than an opportunity. A friend of mine said something very pertinent about the underperformance of equities versus corporate bonds: “If you can earn a 3% risk premium on the bonds why bother with equities”.
The market is on 10.4x 2009 P/E…  So stocks have fallen 45-50% and they are only marginally cheaper (in some cases more expensive!) than in 2007. The market 2009 EPS growth shows expectations of -13.3% , and dividend yield at 4.8% (6.7% for Telecoms, 6% for Oils, 4.6% for Industrials, Basic Materials Consumer Services, 3.8% for Technology, 3.4% for Healthcare and Consumer Goods).
See the picture? yields are at risk as well!. Does one really expect the yield of a 13% falling EPS market to stay sustainable at 5% in the current economic and credit environment? … Cash flows remain under pressure and so will dividend policies.
The new defensives are megacap oils (strong balance sheet, high yield and flexibility on capex) while telecoms and healthcare continue to perform well. However, it is only in telecoms and oils where I see “cycle management” of the balance sheet, true capex management and true focus on ROIC.
I believe this trend will continue. So far long Oils short the market has worked. The steep contango curve has helped, but it’s all about balance sheet today. I believe we will continue to enjoy performance versus the market while we see eranings downgrades everywhere, capital increases and dividend cuts.
But isn’t a 30% outperformance overdone? After all, it’s the biggest continued period of outperformance against the market and the underlying commodity since 1991.
Well, the good news is that the market will continue to find it difficult to “buy something else” but the bad news is that, like in 1991, if oil prices stay low we will see dividend cuts and drastic capex cuts.
In this environment, I cannot agree more with the messages of Morgan Stanley on the “new defensives” in the oil and gas sector: BG (hedged 80% of LNG output to 2010) and Tullow (no refinancing needs after the highly succesful capital increase) versus the highest geared stocks (and I disagree again with consensus) with dividend risk, BP or Statoil.  Stick with Exxon (ongoing buyback, $89bn in cash) and short Conoco.  Buffett was right when he bought into megacap oils in October 2008, but I believe he chose the wrong (relative to peers) stock, Conoco, with the most challenging production, earnings breakdown and growth profile of the US majors.
What? Stick with the expensive outperformers versus the cheap underperformers? Beware of this argument, because the cheap are getting more expensive as downgrades, and cuts in capex and dividend, feed through estimates. Remember that Total traded at 4xEV/DACF and after a 25% fall still trades at those estimated multiples… and the risk of going “nuclear” and putting billions in questionnable EPRs and nuclear plants is not to be overlooked.

The Stimulus Package In Graph Format

Energy, On the cover, Sin categoría

See the graphic…Funny that if you look at the timeline, the cash spent / economic benefit does not really seem to kick in until 2011/2012…just in time for… the next election.  Everything targeted for 2009 seems to be benefits for the unemployed which just generate deficit and debt. A friend also commented that the balloon format of the graphic is appropriate given the plan is full of hot air.

The way I see it, we may get benefit in 2009 as long as they can use their $1 Trn- $2 Trn package to clean up the financials balance sheets adequately, not making them get more geared.  Even if the absolute value right now (MTM) of the liabilities is $20 Trn, taking it out of the public markets helps only moderately, because the liabilities value in my view is likely to depreciate, not appreciate, and in turn will come back to haunt the economy via taxes.

By the way, $825Bn is just a drop in the ocean compared to the loss of 40% of the securitization market, loss of hundreds of billions in annual interest bearing capacity of SIV’s, CLO’s etc… that are now gone… And the complete destruction of wealth for US consumers from dual housing and stock market declines, now estimated at $9 T.  Meanwhile, the first Baby Boomers are hitting 65.

What Obama will not do (or any other Government) and should: Bulldoze unwanted/unsold housing stock and tighten that market… Everything else will follow; psychology, massive injection of new credit/capital into housing stock, refinanceability of existing CDO’s with a return of bids, on and on.  Housing got the world into this problem. That is where we need to focus. That is where we will likely not.  Everything else is a sympathetic symptom.