At These Levels

Pound of Flesh

(Peter Staas) — 2008-09-05T13:06:55Z

Belgian artist Wim Delvoye's newest work is expected to create quite a stir at the upcoming SHContemporary fair in Shanghai: a tattoo of the Virgin Mary and, incidentally, the Swiss man on whose back the image appears.

At first blush, this isn't necessarily out of the ordinary: unoriginal tattoos abound these days. What's noteworthy about Delvoye's latest creation is that the work was sold to a collector last week. The unidentified buyer has the right to sell the tattoo or remove it when the living canvas passes on.

Delvoye's previous work involved tattooing Louis Vuitton logos on live pigs; the artist appears to be moving up the food chain.

More details are available here, courtesy of Bloomberg.

2011 Canadian Trust Taxation to be Overturned?

kzanoni@kci-com.com (Kate Zanoni) — 2008-09-05T13:02:00Z

Roger Conrad gives us general market commentary and explains how Canadian banks have ridden through the recent stress tests to remain stabilized. Canadian trusts have weathered the storm particularly well. But what will happen when these trusts are taxed as corporations starting in 2011? If the trust tax is overturned in an upcoming election, what's the story going forward?

Oil Inventories

egue@kci-com.com (Elliott H. Gue) — 2008-09-04T11:06:33Z

The oil inventory number was just released and looks crude-friendly. Oil inventories tumbled 1.9 million barrels against expectations for a 450,000 barrel build. Gasoline inventories were down a million barrels against expectations for a 1.4 million barrel decline -- just under expectations there.

On the demand front, gasoline demand was down 1.6 percent compared to the same period one year ago. "Demand destruction" continues to decelerate based on these weekly reports.

Let me be clear -- I think oil could have a bit more downside here and I don't think we'll see new highs any time soon. Traders continue to sell any rally in crude as witnessed by the extreme overeaction to Gustav on Monday and Tuesday. Until that pattern is broken it's hard to get overly bullish. However, the fundamental inventory picture is definitely not bearish and the demand destruction trade appears to have been overstated. Therefore, I don't think there'll be a collapse in price either.

Natural Gas Inventories

egue@kci-com.com (Elliott H. Gue) — 2008-09-04T10:45:55Z

It's a busy morning for energy traders with both the crude oil and natural gas inventory reports coming out on the same day due to Monday's holiday. Natural gas is first out this week and we saw a 90 billion cubic foot build. This is dead on expectations and about 12 bcf above the average 78 bcf build we'd see on this week. In my view, that higher-than average-build is mainly a function of the weather last week. At any rate, the initial reaction in the gas market was mildly positive -- I think that's because investors had feared another 100 bcf plus build like we saw last week.

The important point to remember is that inventories remain less than 4 percent above the five-year average. And the effects of Gustav were not included in this report -- the multi-day shut in from that storm will impact the report released next thursday at 10:35 eastern time. The five-year average build for next week is 88 bcf; I suspect we'll come in far under that number, perhaps even something more like 50 or 60 bcf.

Bottom line: I see the marginal cost of US gas at roughly $8/MMBTU. The 12-month gas strip currently stands at just over $8 and I see firm support developing around there. If we end the injection season (November 1) at or near the 5-year average, gas could trade back to $10 easily by year end.

Gustav Still With Us

egue@kci-com.com (Elliott H. Gue) — 2008-09-03T15:04:31Z

The market continues to ignore the effects of Hurricane Gustav but that doesn't mean the storm isn't still interrupting oil and gas production long after it broke up and lost all tropical characteristics. Consider that according to today's 2 pm release from the Minerals Management Service (a government body), approximately 6.8 bcf/day of US natural gas production and 1.25 million bbl/day of US oil production remain shut-in.

As I've said before, it will likely be until the end of this week before we see production begin to come back online. While oil companies have reported only minor damage based mainly on aerial surveys, it takes time to move employees and equipment back into position. It's definitely not a matter of flipping a switch.

Perception is reality when it comes to commodity markets. However, next week when the EIA reports natural gas and oil inventory statistics for this week the reality of these shut-ins will become obvious for all to see. For the record, 6.8 bcf is mroe than 10 percent of US natural gas consumption while 1.25 bbl/day is about 6 percent of US oil consumption.

Gustav Update

egue@kci-com.com (Elliott H. Gue) — 2008-09-02T14:07:57Z

The popular media spin on Gustav is that it was a non-event for the oil and natural gas markets because the storm struck as a strong category 2 rather than a cat 3 or 4. But, the reality is that Gulf Coast production amounting to some 1.3 million bbl of oil per day and 7.04 billion cubic feet of gas per day has been shut-in. The Minerals Management Service released its updated report at 2 pm Eastern stating that as of this morning, 100% of oil production and more than 95% of gas production from the Gulf was offline.

While Gustav may not have caused major damage to refineries and platforms, the best case scenario is that it will take a few more days for all those rigs, wells and equipment to be inspected and put back into service. If there is damage, it could take longer.

Certainly, Gustav was no Katrina or Rita. But, it was hardly a non-event for the oil and gas markets. I still can see a total interruption of 40 to 50 bcf of gas production, a far from insignificant total. The downside in both commodities appears to be a gross overreaction. While I can see oil and gas heading lower short term, it will be instructive to watch how these commodities respond over the next few days as it becomes clear that Gulf Coast production won't come snapping back.

Hurricane Market

egue@kci-com.com (Elliott H. Gue) — 2008-09-02T07:39:52Z

The market is breathing a sigh of relief that Hurricane Gustav hit the Gulf Coast yesterday without causing devastating damage. Gustav clearly wasn't a repeat of Rita or Katrina back in 2005. The market is up and energy commodities--crude oil and natural gas--are sharply lower. However, I do believe we're seeing an overreaction in the commodity markets, especially for natural gas.

I will be on Clean Skies TV this morning at 9 am Eastern (www.cleanskies.tv) to discuss the impact of the storm on oil and natural gas. That interview will be archived on the CleanSkies website.

bshepherd@kci-com.com (Ben Shepherd) — 2008-08-29T16:51:00Z

As a brief aside, Bloomberg ran a story today pointing out that spreads are narrower on Iraqi bonds than Ohio banks. In all fairness, the comparison is between bonds issued by KeyCorp and National City, but I think I'd rather own the debt of troubled US banks (hopefully I don't start a run here) than what in my mind amounts to a failed state.

I get the fact that investors are basically assuming that the US Government will step in if Iraq looks likely to default, but I'm not sure I buy into that argument. Now, maybe if they default in the next few years while we're there and we just have to compel them to sell off some of their oil to pay their debts, that will happen. Hopefully Iraqi bond holders will have the sense to sell before we leave or demand higher yields, because after that, I have a feeling all bets are off.

SUVs Steer from Starbucks to McDonalds

tturner@kci-com.com (Trae Turner) — 2008-08-28T17:35:23Z

This week the Wall Street Journal reports that more casual dining restaurants are in trouble. Darden Restaurants, Inc., parent of Olive Garden and Red Lobster slumps, and NPR reports that high-end retailers like Saks and Nordstrom are following suit while McDonalds sales are up.

No doubt the gap continues to widen between the haves and the have nots when the economic times tighten since obviously construction workers and restaurant servers werent the ones keeping Starbucks in business all along. But now even the SUVs are steering toward McDonalds for their treats.

Natural Gas Prices

bscott@kci-com.com (Ben Scott) — 2008-08-28T16:48:18Z

In-house oil and natural gas guru Elliott Gue gives us his take on the US natural gas market and how tropical activity may affect prices going forward. Weve seen a big run up in prices in the first half of 2008, but whats expected for the remainder of the year?

Serenity Now

gearly@kci-com.com (GS Early) — 2008-08-28T16:29:47Z

As I hear my colleague Elliott Gue move up and down the hall speaking of Gustavo and oil rigs in the Gulf of Mexico and Cat 3 or Cat 4 and natural gas, etc. It sent me to a peaceful place and ironically it was quite near where this current cyclone is headed.

In case you didn't know dear ATL readers, the fine editor of this blog are headed on a cruise in December. Here's the link: http://www.crystalcruises.com/cruise_itinerary.aspx?CID=8328. This is going to be a pretty nice affair--it's a great boat and it leaves from Florida and spends 11 days cruising the Caribbean, going through the Panama Canal and finishing in Costa Rica on the Pacific side.

During the cruise the editors will be giving presentations, hosting more intimate events and basically hanging out with you--when they're not on deadline of course--discussing the markets, stocks, bonds, whatever. I've done a couple of these and KCI has hosted a number of them and I can tell you that everyone who has gone has truly enjoyed the experience, both editors and guests.

So let the tempests blow, we'll soon see the cerulean seas a peace and listen to our Prosperos discuss the markets.

Gas Inventories

egue@kci-com.com (Elliott H. Gue) — 2008-08-28T10:52:31Z

Today's natural gas inventory report showed a 102 billion cubic foot build. This is a very bearish number any way you want to look at it. Normal for this time of year would be somewhere around 55 to 60 bcf while analysts were looking for 80 to 85.

Some will jump to the conclusion that a gas glut looms as rapid growth in US production swamps demand. I think that's ridiculous. The above-average builds witnessed over the past two weeks are a function of what's been a very cool August across much of the nation. For the population-weighted US as a whole, last week saw 59 cooling degree days--the more degree days, the hotter the weather--about 8 percent below average and 18 percent below last year. This suggests light demand for electricity.

At the same time, we are only 71 bcf above-average (2.6 percent) for this time of year; all of that increase has come over the past two weeks. Moreover, Gustav looks to be headed directly for key energy infrastructure in the Gulf of Mexico and could easily offset two weeks of above-average build. The post-report dip in gas prices looks like a good time to buy into gas-levered stocks.

FDIC Quarterly Banking Report

(Peter Staas) — 2008-08-27T13:54:43Z

Yesterday the FDIC released its second-quarter report on the overall performance of insured institutions. As you might have guessed, the results were far from pretty and, when compared to a year ago, appear downright ugly. In fact, the numbers were so ugly that this quarter's report actually eschews the supporting charts and graphics that usually appear in these documents.

Here are some of the lowlights.

Second quarter earnings came in 86.5 percent below a year ago, with an aggregate net income of $5.0 billion (the second lowest since 1991) and a paltry return on assets amounting to 0.15 percent.

The banking industry continues to digest--or, more appropriately, expurgate--the glut of mortgage-related assets originated during the boom years: Net charge-offs of loans and leases reached $26.4 billion, the highest level since 1991, while percentage of noncurrent loans increased to 2.04 percent, the most since 1993.

But the industry isn't sitting on its hands, bellyaching. Loan-loss provisions at insured financial institutions rose 19.1 percent from the first quarter to $23.1 billion and consumed 31.9 percent of the industry's operating income. Despite these efforts, growth in noncurrent loans still exceeded reserves, resulting in a coverage ratio of 88.5 cent for every $1.00 in loans that are overdue by 90 days or more.

Not surprisingly, the number of institutions on the FDIC's problem list increased from 90 to 117 institutions that hold $78.3 billion in assets. FDIC chairwoman Sheila Bair acknowledged that the number of troubled banks would likely increase in coming quarters and indicated that the agency will replenish the fund by raising premiums--or, as reported in the Wall Street Journal, by borrowing from the Treasury Dept.

Nevertheless, although the binge-and-purge financial sector once again finds itself atoning for its excesses, the cloud of doom and gloom hovering over the industry isn't quite all-encompassing. Admittedly, you wouldn't get that impression from the mainstream media that focuses on the travails of the megalenders and a select collection of regional banks. (This approach isn't unwarranted, as the top twenty or so institutions hold an inordinate percentage of the industry's assets).

Consider the following: Whereas 30.2 percent of the 116 institutions with over $1 billion in assets were unprofitable, only 14.4 percent of the 4,473 banks with $100 million to $1 billion in assets were unprofitable. At an aggregate level, the percentage return on assets tended to increase as the size of the bank decreased.

That's not to suggest that as a whole smaller banks are much healthier than their larger brethren; if a glance at the FDIC's list of failed institutions doesn't dispel that illusion, remember that many of these banks also have substantial exposure commercial and residential mortgages as well as loans to homebuilding companies.

These caveats aside, there are many banks that exercised restraint during the most recent profit party and remain on solid financial footing. Wells Fargo and US Bancorp leap to mind by dint of their size and media coverage, but smaller institutions can offer investors reliable dividends and, in some cases, growth potential. It's also important to remember that economic conditions vary around the country; banks in Texas, for instance, generally face fewer challenges than their peers in Ohio or California.

And although banks and regulators allowed many of the lessons from the S&L crisis to fall by the wayside, there's one which investors stick in investors' minds: banks that boosted their market share during the contraction were in a position to profit once the markets improved.

Rather than calling the bottom that many in the media discuss, the key for investors is to closely scrutinize banks' balance sheets and loan portfolios to identify those that can capitalize on the current downturn.

Nanotech Reality Check

kzanoni@kci-com.com (Kate Zanoni) — 2008-08-27T12:03:54Z

Executive Editor Gregg Early provides the latest happenings in the nanotech industry below:

I was reading through some e-mails and journals recently, sorting through some of the scientific happenings in the nanotech world, and something started to resonate with me that played out fully when I was at the SPIE Photonics and Optics Conference in San Diego a couple weeks ago. Although there's great interest from the investor side in nanotech, US industry isn't moving very quickly into this space.

At the SPIE conference, there were about 4,000 scientists from around the world. And after spending four days going to poster sessions, plenary sessions and presentations, I have to say US scientists were in the minority of presenters. That's not to say the scientists represented foreign institutions and companies. On the contrary, many were doing research in US university labs. But the fact remains that many of these folks were on student visas, doing post-doc work overseas and--in one way or another--weren't doing the work with the expectation of landing a job with a big US firm because it's the only place to find opportunity.

Science has no borders. A friend of mine shared the following words of wisdom that his old fashioned, Greek father always told him, "Learn as much as you can because even if you lose your possessions, no one can take your knowledge."

I continue to see this adage played in the hunger of some scientists willing to leave their worldly possessions in an attempt to gain a knowledge that will make them assets to any organization to which they choose to belong. And no single country provides the opportunities for them as it might have a generation ago. Hopefully, a generation from now, we won't be sending US children to Bangalore, Beijing or Bonn to stay on par with the globalized, knowledge-based labor force in order to keep US industry competitive.

Granted, in a world of multinationals, borders are somewhat antiquated already. But I would say most people--rightly or wrongly--still see General Electric or Microsoft as US firms even if they've built universities in India before they build any here. I still hear investors talking about wanting to "buy American stocks," and I wonder what that means since Siemens (NYSE: SI) is quickly becoming the operational structure of the US Postal Service. There are plenty of similar examples of US icons that are US in name only. The sturdy American Westinghouse brand is now owned by Toshiba (OTC: TOSBF). RCA is owed by a French company. Likewise, the UK's iconic Land Rover is owned by an Indian company.

Getting back to my jumping-off point, one of my relatives was talking about her daughter the other night, a US-based division vice president at Siemens. She said her daughter told her, "Everything is about nanotechnology now."

The VP isn't in a scientific division, nor is she a scientist. This was more like the line from the movie The Graduate, "I have one word for you son, plastics." However absurd it was to hear this in the late 1960s, it may seem just as absurd for investors to hear "nanotechnology" now. But the fact remains: Plastics did pretty well for quite a while and continue to fill our world with products, packaging and equipment.

But the connection hasn't been made in US yet. There are some small companies making some very interesting inroads, but most of the major players are foreign-based multinationals that are operating on a much more global model than many US behemoths. In the past decade, Siemens has gained 144 percent; GE has lost 5 percent. You can play the same game with a number of different companies.

The point is, don't be as parochial as the suits in the boardrooms of old-fashioned companies. Don't wave a flag and think it means the same thing it did one, two or three decades ago. Science and knowledge will proliferate because it's human nature, and no one can subjugate progress.

In my own experience, I believe in good ol' American Motorola (NYSE: MOT). This company has been the poster child for the US brash, high-tech can-do attitude for generations. But management can't get out of the way of R&D. And I know a former director of one of its R&D divisions who admitted as much. A few years ago, I thought the company had put troubles in this area behind it; it was the No. 2 maker of mobile phones, its cable boxes were being installed in homes across the US and there was some very exciting carbon nanotube work relating to display screens. And then the innovation came to screeching halt.

The mobile division imploded, the cable division has notoriously finicky boxes and nothing is showing up from any R&D pipeline. The stock has plummeted, management is in utter disarray and the business is foundering. But for some stupid reason, I keep thinking it will all work itself out. But when a company is drowning, the competition doesn't throw a lifeline; it throws bricks.

In the past year, Moto's mobile market share has gone from 20 percent to 7.5 percent. Ironically, the only market in which it's still No. 1? The good ol' US.

But my American optimism always finds a silver lining. Late last week, Moto put former Qualcomm Chief Operating Officer Sanjay Jha into the saddle of its mobile services division, and he's moving fast out of the gate. He's promised 50 new models in the next year and has a lot of experience in code division multiple access (CDMA) and Global System for Mobile (GSM) technologies, which means all major US carriers can have a crack at some exclusive phones for their services. Also, being a veteran of the exploding Asian mobile markets, he's launching new models there as I write.

Perhaps some of this has to do with Carl Icahn's power play on the board. I can't imagine how you grade a talent like Jha unless you promise him a wide berth and plenty of action. The jury is still out, but hey, it's a bargain.

The five countries to watch: China, India, Australia, Germany and Singapore. And maybe, just maybe, the US. The markets are there as well as the consumers; let's see if the companies get the message.

Oil Inventories

egue@kci-com.com (Elliott H. Gue) — 2008-08-27T11:04:56Z

The EIA has released its weekly oil inventory numbers. Overall, a mixed bag: gasoline inventories fell a bit less than expected while oil inventories fell in contrast to expectations for a further build. Overall, however, there is no sign of an oil or refined products glut in the US right now -- crude is about in-line with where it should be for this time of year while gasoline is actually very, very tight and below the lower boundary of the five year average range.

Granted, gasoline demand is also lower so gasoline inventories can be lower than average without prompting a supply squeeze. But, if anything, the pace of US gasoline demand destruction has slowed. US gasoline demand is off just 1.6 percent compared to the same four-week period one year ago. This is half the 3 percent plus pace registered earleir this summer. It appears that as gas prices backed off under $4/gallon some of that demand came roaring back.

Bottom line: the oil market isn't focused on these numbers as much as would normally be the case. The reason: Tropical Storm Gustav, likely to restrengthen to a hurricane again today as it moves off land and back over water, appears to be headed for the heart of Gulf Coast energy-related infrastructure.

Of course, the biggest impacts of Gustav won't be in the oil market but in natural gas as I noted in a post yesterday morning.

At These Levels

Pound of Flesh

2011 Canadian Trust Taxation to be Overturned?

Oil Inventories

Natural Gas Inventories

Gustav Still With Us

Gustav Update

Hurricane Market

SUVs Steer from Starbucks to McDonalds

Natural Gas Prices

Serenity Now

Gas Inventories

FDIC Quarterly Banking Report

Nanotech Reality Check

Oil Inventories

SUVs Steer from Starbucks to McDonalds