Timing & trends

Peter Grandich: Incredible Times Coming

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Posted by Peter Grandich via Michael Campbell

on Wednesday, 22 August 2012 08:25

Peter Grandich told Michael Campbell he thinks that the consolidation of Gold around the $1,600 level is constructive within the Mother of All Bull Markets and in his opinion the Bull Market continues to be fully intact. After Gold has had a major move for a decade, the constructiveness is that almost a year from the top last September to the lows today of $1,500 and change was not that bad. "We have been making a series of slightly higher lows and it looks like the market is ready to challenge and surpass the resistance at $1,630 - $1,650".

What Peter found really interesting this past week, "and I just think it was a damaging blow of many that continue for the perma bears in Gold, was the news on George Soros. A year ago the perma bears throughout the world highlighted the fact that Soros said that Gold was in the ultimate asset bubble and was about to collapse. What news comes out? George Soros doubles his position in Gold. I not only find that interesting, I find that most if not all of the bearish arguments get torn up".

Peter also points out that wiithin the last year we heard about all of the selling that was going to come out, yet what was the net result? Central Banks were net buyers. Tp Peter the Gold market remains very very bullish. Further, it continues to suggest that all of the reasons that you want to own it remain. Central Banks aren't sellers anymore, producers don't sell it forward anymore and there is an ever increasing demand. Almost all of the physical buying is done outside America, he calculates that if he walked into any financial institution here in any of the 50 states in America and looked at 100 accounts,  99 of them would not have touched physical Gold. Simply put, that until we see the North American Community at large talking about and buying Gold we are not anywhere close to the highs it is going to strike.

Peter also highlights a very important change in Gold market,  and that change is the seasonality factor. "Almost 65% of Golds demand for Gold is related to Jewelry purchases. Jewelry fabricators basically take the months off July and August, but return in early September to do about 2/3'rds of all  their business in the next 6- 8 weeks. So that seasonal factor now is going to start to turn positive for Gold, and I fully suspect and am anticipating in my own heart that we are going to break about resistance and if you have me on in the next month or two we will have Gold in the $1,700 - $1,800 area". 

Gold Stocks
The senior Golds are 30-40% lower than they were at their  highs when Gold itself is at shouting distance of its highs. There has been two changes:

1. "for whatever reasons, mining shares used to carry a much higher P.E.'s and one of those reasons was that there wasn't many alternatives to invest in, like we have now with exchanged traded funds, a very common investment especially in the Precious Metals. Now we see some of the producers, take Barrick for example, that are below market multiples. So that's the first thing that adjusted."
2. The second thing that adjusted "is they incurred dramatically higher costs, despite the rise in Gold prices, their ability to operate has changed for a lot of reasons. We no longer have the high grade easy to get to deposits that were once available in the world. So the combination of the P.E. scenario and the more difficult deposits is one of the reasons they have lagged up until now". 
Junior Miners
In the Junior Market we see losses 50-80% from their highs. Its a market that's been heavily damaged, and he doesn't expect the market to recover unless Gold should have a major rally in the 4th quarter. Peter likens these Junior Miners to burning matches, in that they are always raising and spending money. Now that their share prices are dramatically down, the financiers know that, so its going to be very difficult to raise capital for the remaining part of the year. Having said that, "we have seen the old classic throwing the baby out with the bathwater, we are seeing many companies whose projects net asset value is many times larger than their current market cap which is kind of ridiculous". But other than a bounce, and a real drying up of the selling he thinks the worst is over. He just doesn't see that market able to recover dramatically until we get into the next year. If Gold rallies we could get a 20- 30% bounce from where they are here, but to see them really sustain anything Peter doesn't think it will happen until at least next year. 
Stocks to put on our radar screens. 
Peter points out that the big mistake we make, certainly he admits to making, is that sometimes we forget that failure is the norm for Junior Resource market. Despite all of the good efforts by the vast majority of companies trying to bring a deposit in, they are just not going to be able to find a big deposit, and sell it or develop it. He thinks 8 or 9 out of 10, despite all those efforts, will fail over time. In short "to buy and hold for the long term period usually ends up most of the time not working out".

But in this particular case, and in about 6 or 7 times in the last 10 years, the Junior Market as measured by the TSX Venture Index really gets clobbered and this time is no different. During those times certain companies who are really past the point of failure, where its only a question of how big they are going to be, they get thrown out with the others. They get marked down almost as much, sometimes more percentage wise even though they are going to be one of the survivors. "Those are the situations that make for opportunity, and one thing I can say clearly here, rather than give any individual names, is to say that you are pretty well safe and secure now",  Peter doesn't think there is much more downside risk, that the index doesn't have much more than 5-10% downside. He thinks when this index bounces and gets traction in the 1-2nd Quarter of next year we could look at a 50% or more rally in the index. "So its pretty much secure that if you haven't sold by now other than for tax loss purposes, there is nothing to be gained because the loses are mostly washed out". 
Peter does think that the safer play is higher up the food chain as many of the Majors have been beaten down. For example American Barrick is selling for a multiple that is less than the S&P 500. He feels much safer knowing that if 10 people were listening and bought Barrick he could look them in the face in the future and not have to explain why they lost money in the last 2-3 years. Simply a better situation than picking some Junior name right now. The right move according to Peter is to err on the Major side and be more cautious as you go down the food chain. "The Junior market is really going to be on its knees to the financiers through here, they don't have much to bargain with. They have seen their share price come down, many were already at fairly high levels of shares outstanding and are going to be highly diluted, so two things are almost certain to happen:

1.  There is going to be rollbacks especially announced towards the end of the year,

2. There is going to be mergers, acquisitions and consolidations in this business". 
Peter has heard numbers tossed around that maybe 30- 40-50 companies at least will go through that process in the next 6-12 months and Peter thinks that could be a low number.  Peter also thinks that is going to be one of the ways that the industry finds a way to survive another crash like environment and be prepared to prosper again and have a great rally again sometime in the future. 

Peter Grandich

Though he never finished high school, Peter Grandich entered Wall Street in the mid-1980s with no formal education or training and within three years was appointed Vice President of Investment Strategy for a leading New York Stock Exchange member firm. He would go on to hold positions as a Market Strategist, portfolio manager for four hedgefunds and a mutual fund that bared his name.

His abilities has resulted in hundreds of media interviews including GMA, Neil Cavuto’s Your World on Fox News, The Kudlow Report on CNBC, Wall Street Journal, Barron’s, Financial Post, Globe and Mail, US News & World Report, New York Times, Business Week, MarketWatch, Business News Network and dozens more. He’s spoken at investment conferences around the globe, edited numerous investment newsletters, and is one of the more sought after commentators.

Grandich is the founder of Grandich.com and Grandich Publications, LLC, and is editor of The Grandich Letter which was first published in 1984. On his internationally-followed blog, he comments daily about the world’s economies and financial markets and posts his views on social and political topics.  He also blogs about a variety of timely subjects of general interest and interweaves his unique brand of humor and every-man “Grandichism” expressions with his experience gained from more than 25 years in and around Wall Street. The result is an insightful and intuitive look at business, finances and the world, set in a vernacular that just about anyone can understand. In his first year, Grandich’s wildly-popular blog had more than one million views. Grandich also provides a variety of services to publicly-held corporations on a compensation basis.

Grandich’s autobiography, Confessions of a Wall Street Whiz Kid, was publiched in fall 2011.


Timing & trends

The Chart That Keeps Us Up At Night

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Posted by The Big Picture

on Tuesday, 21 August 2012 08:28

The only major global equity index which we monitor — and it is a big one – that is down for the year is the Shanghai Composite.   The chart looks ugly and ready to break to new lows after its post crash peak of 3,477, way back in August 2009.

The Shanghai is down 39.2 percent from its post crash high while the S&P500 is up 42.3 percent over the same period.   After falling 72.8 percent in a little over a year from its October 2007 peak, the Shanghai is now up a lowly 27 percent from it crash low.  This compares to the S&P500, which fell 57.7 percent from the October 2007 high to the March 2009 low,  and has now recovered 112.7% and continues to move higher.

A stunning divergence of the world’s two largest economies’ stock markets.

What makes us a little nervous is the Chinese stock market was the first to really collapse after peaking in the fall of 2007  and the first to bottom just a year later.    We can relax a little as such a large and sustained divergence since August 2009 largely dismisses the notion that the Shanghai leads U.S. and global equity markets,  however.   The chart below illustrates even the Hang Seng, one of our favorite indicator species for global risk appetite, has decoupled from the Shanghai.

What does the continued poor performance of the Shanghai signal?   Not sure, but either Chinese stocks are holding a massive fire sale and the Shanghai is setting up for a huge bounce or Air China is crash landing.  And the latter, folks,  ain’t good.

Another 2o percent drop in the Shanghai from current levels and it will be testing the lows of the 2008 crash.  Keep this one one your radar.

aug19 shanghai

aug19 shanghaisp500

aug19 shanghai_hangseng1

(click here if charts are not observable)


Timing & trends

Financial Markets, Politics, and the New Reality

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Posted by George Friedman - Stratfor via John Mauldin's Outside the Bpx

on Monday, 20 August 2012 16:18

If you've been following my newsletter, you're familiar by now with my friend George Friedman and the geopolitical analysis company he founded, Stratfor. And if you've read any of George's work, you know that his entire methodology is based on the premise that the actions of leaders and nations are predictable. George starts with the constraints – what can they notdo, assuming they're rational actors – and moves forward from there. It's this methodology that allowed him to – in all seriousness and probably with an impressive amount of accuracy – write a book titled The Next 100 Years.

I've always encouraged my readers to keep up with George's work at Stratfor. His expertise is not in investing, but the understanding of global politics he provides is essential for any global investor. That said, this week George set his sights on the world of investing with a rather harsh accusation: that investors today lack both imagination and an understanding of political economy.

It's always uncomfortable, to say the least, when good thinkers turn a critical eye on your own profession. I don't necessarily agree with George's conclusions, but I respect him enough to give his ideas some careful consideration and share them with my readers. After all, my basic premise with Outside the Box is that there is little to gain by reading only the work of those with whom we agree.

If George's piece makes you think, I recommend you check out Stratfor. They offer a substantial discount on subscriptions to OTB readers, plus a complimentary copy of the aforementioned book, The Next 100 Years, for new subscribers. <<Click here to access the offer.>>

Your not so unimaginative analyst,

John Mauldin, Editor 
Outside the Box

via George Friedman - Strafor

Louis M. Bacon is the head of Moore Capital Management, one of the largest and most influential hedge funds in the world. Last week, he announced that he was returning one quarter of his largest fund, about $2 billion, to his investors. The reason he gave to The New York Times was that he had found it difficult to invest given the impossibility of predicting the European situation. He was quoted as saying, "The political involvement is so extreme – we have not seen this since the postwar era. What they are doing is trying to thwart natural market outcomes. It is amazing how important the decision-making of one person, Angela Merkel, has become to world markets."

The purpose of hedge funds is to make money, and what Bacon essentially said was that it is impossible to make money when there is heavy political involvement, because political involvement introduces unpredictability in the market. Therefore, prudent investment becomes impossible. Hedge funds have become critical to global capital allocation because their actions influence other important actors, and their unwillingness to invest and trade has significant implications for capital availability. If others follow Moore Capital's lead, as they will, there will be greater difficulty in raising the capital needed to address the problem of Europe.

But more interesting is the reasoning. In Bacon's remarks, there is the idea that political decisions are unpredictable, or less predictable than economic decisions. Instead of seeing German Chancellor Merkel as a prisoner of non-market forces that constrain her actions, conventional investors seem to feel that Europe is now subject to Merkel's whims. I would argue that political decisions are predictable and that Merkel is not making decisions as much as reflecting the impersonal forces that drive her. If you understand those impersonal forces, it is possible to predict political behaviors, as you can market behaviors. Neither is an exact science, but properly done, neither is impossible.

Political Economy

In order to do this, you must begin with two insights. The first is that politics and the markets always interact. The very foundation of the market – the limited liability corporation – is political. What many take as natural is actually a political contrivance that allows investors to limit their liability. The manner in which liability is limited is a legal issue, not a market issue, and is designed by politicians. The structure of risk in modern society revolves around the corporation, and the corporation is an artifice of politics along with risk. There is nothing natural about a nation's corporate laws, and it is those corporate laws that define the markets.

There are times when politics leave such laws unchanged and times when politics intrude. The last generation has been a unique time in which the prosperity of the markets allowed the legal structure to remain generally unchanged. After 2008, that stability was no longer possible. But active political involvement in the markets is actually the norm, not the exception. Contemporary investors have taken a dramatic exception – the last generation – and lacking a historical sense have mistaken it for the norm. This explains the inability of contemporary investors to cope with things that prior generations constantly faced.

The second insight is the recognition that thinkers such as Adam Smith and David Ricardo, who modern investors so admire, understood this perfectly. They never used the term "economics" by itself, but only in conjunction with politics; they called it political economy. The term "economy" didn't stand by itself until the 1880s when a group called the Marginalists sought to mathematize economics and cast it free from politics as a stand-alone social science discipline. The quantification of economics and finance led to a belief – never held by men like Smith – that there was an independent sphere of economics where politics didn't intrude and that mathematics allowed markets to be predictable, if only politics wouldn't interfere.

Given that politics and economics could never be separated, the mathematics were never quite as predictive as one would have thought. The hyper-quantification of market analysis, oblivious to overriding political considerations, exacerbated market swings. Economists and financiers focused on the numbers instead of the political consequences of the numbers and the political redefinitions of the rules of corporate actors, which the political system had invented in the first place.

The world is not unpredictable, and neither is Europe nor Germany. The matter at hand is neither what politicians say they want to do nor what they secretly wish to do. Indeed, it is not in understanding what they will do. Rather, the key to predicting the political process is understanding constraints – the things they can't do. Investors' view that markets are made unpredictable by politics misses two points. First, there has not been a market independent of politics since the corporation was invented. Second, politics and economics are both human endeavors, and both therefore have a degree of predictability.

The European Union was created for political reasons. Economic considerations were a means to an end, and that end was to stop the wars that had torn Europe apart in the first half of the 20th century. The key was linking Germany and France in an unbreakable alliance based on the promise of economic prosperity. Anyone who doesn't understand the political origins of the European Union and focuses only on its economic intent fails to understand how it works and can be taken by surprise by the actions of its politicians.

Postwar Europe evolved with Germany resuming its prewar role as a massive exporting power. For the Germans, the early versions of European unification became the foundation to the solution of the German problem, which was that Germany's productive capacity outstripped its ability to consume. Germany had to export in order to sustain its economy, and any barriers to free trade threatened German interests. The creation of a free trade zone in Europe was the fundamental imperative, and the more nations that free trade zone encompassed, the more markets were available to Germany. Therefore, Germany was aggressive in expanding the free trade zone.

Germany was also a great supporter of Europewide standards in areas such as employment policy, environmental policy and so on. These policies protect larger German companies, which are able to absorb the costs, from entrepreneurial competition from the rest of Europe. Raising the cost of entry into the marketplace was an important part of Germany's strategy.

Finally, Germany was a champion of the euro, a single currency controlled by a single bank over which Germany had influence in proportion to its importance. The single currency, with its focus on avoiding inflation, protected German creditors against European countries inflating their way out of debt. The debt was denominated in euros, the European Central Bank controlled the value of the euro, and European countries inside and outside the eurozone were trapped in this monetary policy.

So long as there was prosperity, the underlying problems of the system were hidden. But the 2008 crisis revealed the problems. First, most European countries had significant negative balances of trade with Germany. Second, European monetary policy focused on protecting the interests of Germany and, to a lesser extent, France. The regulatory regime created systemic rigidity, which protected existing large corporations.

Merkel's policy under these circumstances was imposed on her by reality. Germany was utterly dependent on its exports, and its exports in Europe were critical. She had to make certain that the free trade zone remained intact. Secondarily, she had to minimize the cost to Germany of stabilizing the system by shifting it onto other countries. She also had to convince her countrymen that the crisis was due to profligate Southern Europeans and that she would not permit them to take advantage of Germans. The truth was that the crisis was caused by Germany's using the trading system to flood markets with its goods, its limiting competition through regulations, and that for every euro carelessly borrowed, a euro was carelessly lent. Like a good politician, Merkel created the myth of the crafty Greek fooling the trusting Deutsche Bank examiner.

The rhetoric notwithstanding, Merkel's decision-making was clear. First, under no circumstances could she permit any country to leave the free trade zone of the European Union. Once that began she could not predict where it would end, save that it might end in German catastrophe. Second, for economic and political reasons she had to be as aggressive as possible with defaulting borrowers. But she could never be so aggressive as to cause them to decide that default and withdrawal made more sense than remaining in the system.

Merkel was not making decisions; she was acting out a script that had been written into the structure of the European Union and the German economy. Merkel would create crises that would shore up her domestic position, posture for the best conceivable deal without forcing withdrawal, and in the end either craft a deal that was not enforced or simply capitulate, putting the problem off until the next meeting of whatever group.

In the end, the Germans would have to absorb the cost of the crisis. Merkel, of course, knew that. She attempted to extract a new European structure in return for Germany's inevitable capitulation to Europe. Merkel understood that Europe, and one of the foundations of European prosperity, was cracking. Her solution was to propose a new structure in which European countries accepted Brussels' oversight of their domestic budgets as part of a systemic solution by the Germans. Some countries outright rejected this proposal, while others agreed, knowing it would never be implemented. Merkel's attempt to recoup by creating an even more powerful European apparatus was bound to fail for two reasons. First and most important, giving up sovereignty is not something nations do easily – especially not European nations and not to what was effectively a German structure. Second, the rest of Europe knew that it didn't have to give in because in the end Germany would either underwrite the solution (by far the most likely outcome) or the free trade zone would shatter.

If we understand the obvious, then Merkel's actions were completely understandable. Germany needed the European Union more than any other country because of its trade dependency. Germany could not allow the union to devolve into disconnected nations. Therefore, Germany would constantly bluff and back off. The entire Greek drama was the exemplar of this. It was Merkel who was trapped and, being trapped, she was predictable.

The euro question was interesting because it intersected the banking system. But in focusing on the euro, investors failed to understand that it was a secondary issue. The European Union was a political institution and European unity came first. The lenders were far more concerned about the fate of their loans than the borrowers were. And whatever the shadow play of the European Central Bank, they would wind up doing the least they could do to avert default – but they would avert default. The euro might have been what investors traded, but it was not what the game was about. The game was about the free trade zone and Franco-German unity. Merkel was not making decisions based on the euro, but on other more pressing considerations.

Modern Trading

The investors' problem is that they mistake the period between 1991 and 2008 as the norm and keep waiting for it to return. I saw it as a freakish period that could survive only until the next major financial crisis – and there always is one. While the unusual period was under way, political and trade issues subsided under the balm of prosperity. During that time, the internal cycles and shifts of the European financial system operated with minimal external turbulence, and for those schooled in profiting from these financial eddies, it was a good time to trade.

Once the 2008 crisis hit external factors that were always there but quiescent became more overt. The internal workings of the financial system became dependent on external forces. We were in the world of political economy, and the political became like a tidal wave, making the trading cycles and opportunities that traders depended on since 1991 irrelevant. And so, having lost money in 2008, they could never find their footing again. They now lived in a world where Merkel was more important than a sharp trader.

Actually, Merkel was not more important than the trader. They were both trapped within constraints about which they could do nothing. But if those constraints were understood, Merkel's behavior could be predicted. The real problem for the hedge funds was not that they didn't understand what they were doing, but the manner in which they had traded in the past simply no longer worked. Even understanding and predicting what political leaders will do is of no value if you insist on a trading model built for a world that no longer exists.

What is called high velocity trading, constantly trading on the infinitesimal movements of a calm but predictable environment, doesn't work during a political tidal wave. And investors of the last generation do not know how to trade in a tidal wave. When we recall the two world wars and the Cold War, we see that this was the norm for the century and that fortunes were made. But the latest generation of investors wants to control risk rather than take advantage of new realities.

However we feel about the performance of the financial community since 2007, there must be a system of capital allocation. That can be operated by the state, but there is empirical evidence that the state isn't very good at making investment decisions. But then, the performance of the financial community has been equally unacceptable, with more than its share of mendacity to boot. The argument for private capital allocation may be theoretically powerful, but the fact is that the empirical validation of the private model hasn't been there for several years.

A strong argument can be made – corruption and stupidity aside – that the real problem has been a failure of imagination. We have re-entered an era in which political factors will dominate economic decisions. This has been the norm for a very long time, and traders who wait for the old era to return will be disappointed. Politics can be predicted if you understand the constraints under which a politician such as Merkel acts and don't believe that it is simply random decisions. But to do that, you have to return to Adam Smith and recall the title of his greatest work, The Wealth of Nations. Note that Smith was writing about nations, about politics and economics – about political economy.



John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC and InvestorsInsight Publishing, Inc. (InvestorsInsight) may or may not have investments in any funds, programs or companies cited above.


Communications from InvestorsInsight are intended solely for informational purposes. Statements made by various authors, advertisers, sponsors and other contributors do not necessarily reflect the opinions of InvestorsInsight, and should not be construed as an endorsement by InvestorsInsight, either expressed or implied. InvestorsInsight is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

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Posted 08-17-2012 1:00 by John Mauldin

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Timing & trends

Long-Term Technical Outlook for Gold & Silver

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Posted by Jordan Roy Byrne via Daily Gold

on Monday, 20 August 2012 11:59

Knowing that it’s very likely that Gold and Silver have bottomed, we feel it is time to look at the charts and assess what may or may not be in store over the next year or two.

Gold has consistently made impulsive advances that were digested by multi-quarter corrections and eventually followed by a breakout and new impulsive advance. Following the last major breakout in late 2009, Gold enjoyed an extended impulsive advance that lasted two years. Previous impulsive advances lasted less than a year. Gold, having bottomed, remains well entrenched in another consolidation that is 12 months old. As we can see from the chart, previous consolidations lasted 16 to 20 months.


It is important to note that previously Gold, within a year was able to rally back near the recent impulsive high. In other words, Gold is currently in a much weaker state relative to past consolidations. Gold will need to rally back to $1800 or $1900 and that would be followed by a multi-month consolidation that would lead to a breakout. Conservatively speaking, over the next 12 months we could see a rally back to $1900 and a final consolidation.

Meanwhile, Silver continues to consolidate and digest the two and a half year advance from $8 to $49. Predictions of $60 or $70 Silver are absurd and fail to account for the lengthy consolidation that is needed to reduce supply and position the market for not only a retest of $50 but an actual breakout. Silver is a commodity with real world supply and demand dynamics. It will be a while before producers won’t sell for $35-$36 and before buyers consider $35 a bargain. That being said, the near and medium term outlook is quite compelling. Longer-term, the market is in a giant cup and handle pattern (dating back to the high in 1980) and this correction and consolidation is the handle. A powerful breakout past $50 in, say 2014, could push Silver towards its bubble phase.


The fact that Gold and Silver are unlikely to break to new highs anytime soon hardly deters me in my bullish enthusiasm for select gold and silver stocks. Key word being select. I’m not bullish on every mining company but I digress. In the chart below I use a 66-day moving average to plot an average quarterly Gold and Silver price. I also circle the moving average at the end of quarters.


Note that the quarterly high prices for Gold and Silver are roughly $1750 and $39 and far off from the 2011 highs. The quarterly averages are starting to turn up. Well run companies with production increases could very well move to new highs when Gold returns to $1750 and Silver moves past $35. We do think most of the Gold and Silver shares can breakout to new highs ahead of the metals. In other words, the mining shares at large will ultimately challenge for a breakout ahead of Gold and Silver reaching new all time highs. If you’d be interested in our professional guidance and uncovering the producers and explorers poised for big gains, then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT


Timing & trends

Gusher - Soaring Demand for Oil Rigs

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Posted by Rudy Martin via Uncommon Wisdom

on Friday, 17 August 2012 10:06

One Emerging Bright Spot in the Gloomy Energy Sector

The energy sector is expected to see a 12% drop in earnings this quarter. But one segment — offshore drilling companies — is bucking the trend. And that’s where the next investing gusher could be.

For example, last month Noble Corp. (NE), the owner of the world’s third-largest offshore drilling fleet, reported that its year-over-year earnings shot up by 250%. Quarterly profits tripled, costly downtime decreased, and revenue grew with the debut of new rigs in Brazil and the Gulf of Mexico.

Demand for deepwater rigs is so strong that Noble and Diamond Offshore Drilling (DO) are already looking at 2014 deals. Production for 2013 is mostly booked at higher levels.

Diamond announced that Ocean Onyx, a rig under construction in Texas, will start a one-year contract with Apache Corp. (APA) in the third quarter of 2013.

The rate: $490,000 per day!

Demand Is Growing, 
Giving Rig Builders Added Leverage

Last week Noble revealed a three-year deal for an ultra-deepwater drillship now under construction, in a contract that will average $618,000 per day starting in 2014 — making it one of the company’s most lucrative rigs.

What’s more, the normally reserved Swiss management forecasts a plethora of such deals in the near future.

And the sector leader, Transocean Ltd. (RIG), plans to sell up to $1 BILLION worth of rigs this year, as all the leading rig operators focus on improving their fleets. Fleet utilization at Transocean was 66% for this year’s second quarter, up from 61% in the first quarter.

Again, the rising pricing impact is not limited to just one company ...

Transocean’s Deepwater Deep Seas drillship was hired byMurphy Oil Corp. (MUR) at $595,000 per day starting next March, in another sign of strong deepwater demand when compared with its previous $450,000 rate.

The shortage is driving acquisitions, too ...

Ensco (ESV), the second-largest offshore drilling company in the world, announced its second-quarter results a few weeks ago. Benefiting from the acquisition of Pride International, the deal doubled Ensco’s net income from the prior year’s quarter. But there’s also room for further earnings growth by moving some of the newer rigs to higher-rate contracts.

So What’s Going On?

Just five years ago, it was widely believed that U.S. oil and natural gas production would follow a path of steady decline.

Now the Energy Information Administration (EIA) predicts that total U.S. liquids production will climb to 12.1 million barrels per day by 2025 — a 38% increase over the 2005 projection.

Several other countries in the Western Hemisphere, including Brazil and Canada, are also expected to post significant increases in oil output ...


Tapping its recent discovery could prove Brazil's greatest challenge.

Based on the EIA’s most recent projections, Brazil’s oil output should rise by 2.8 million barrels per day between 2009 and 2035. All the increase will virtually come from the pre-salt fields in the Atlantic, about 200 miles southeast of Rio de Janeiro.

But this is easier said than done as Brazil’s state-controlled oil company, Petrobras (PZE), admits ...

These fields are located beneath a mile-and-a-half of ocean and another two miles of sand, rock and shifting salt layers.

Reaching them will require drilling technology even more costly and sophisticated than that used by BP Plc (BP), ExxonMobil (XOM) and other private firms in the Gulf of Mexico. And don’t forget there’s always the risk of a catastrophic blowout like the one that destroyed the Deepwater Horizon.

For Canada, the EIA projects the output from its Athabasca tar sands in the Alberta Province to jump from 1.7 million barrels per day in 2009 to 4.8 million in 2035, an impressive 180% increase.

The bottom line here is that the oil industry is struggling to find enough equipment to meet its surging production demand.

No wonder Atwood Oceanics (ATW) — which owns a small fleet of 10 mobile offshore-drilling units located in the U.S., Gulf of Mexico, South America, the Mediterranean Sea, West Africa, Southeast Asia and Australia — is running at 95% utilization!

That’s why I’m looking forward to Seadrill’s (SDRL) earnings release at the end of this month for more positive news. The Norwegian offshore oil rig operator won a deal potentially worth $4 billion for three of its drillships in the Gulf of Mexico. The deal was one of the biggest in the global rig industry.

My take on this is that offshore drilling companies will continue to be one of the bright spots in an overall gloomy sector, with day rates increasing and rig-utilization numbers growing.

And I plan on watching this segment of the energy market very closely.

Best wishes,



Latin American Specialist

Rudy Martin is the former director of research for TheStreet.com Ratings.

In addition to his periodic contributions on this and other financial sites, Rudy writes a monthly newsletter The Latin Capital Market Report and is the editor of Weiss Research’s special report, The Greatest Riches in Latin America.

Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master’s degree in finance from Kellogg Northwestern University.

For more information about Rudy Martin and The Latin Capital Market Report visitwww.latincapitalmarket.com

Rudy appreciates your feedback; click here to send him an email.


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