Baltic Dry Index. 771 -11 Brent Crude 56.42
LIR Gold Target in 2019: $30,000. Revised due to QE programs.
Presented without need for comment by me. Uncle Scam is entering yet
another oil and related industries mal-investment oil bust. Unfortunately, thanks
to the Benank, "Bubbles" Greenspan and the Fed’s talking chair, this
mal-investment bust is likely to be the mal-investment bust of all time.
Below, David Stockman punctures the Fedster’s “sand bubble.”
There can be few
fields of human endeavour in which history counts for so little as in the world
of finance. Past experience, to the extent that it is part of memory at all, is
dismissed as the primitive refuge of those who do not have the insight to
appreciate the incredible wonders of the present.
J. K. Galbraith.
Why The Stock Market Casino Is Dangerous: The Case Of Looney Tunes In the Sand Dunes
by David Stockman •
On August 4th the Wall Street
Journal carried a breathless tale of how a handful of obscure oilfield
suppliers were striking immense riches in the sand dunes of Wisconsin. Owing to
the “shale revolution”, the stock price of an outfit that had
originated in the stagnating business of supplying sand traps to golf
courses, and which had been at death’s door as recently as 2011, had gone
parabolic.
Emerge Energy Services
(EMES) presently traded at $145 per share, reflecting a red hot gain
of 8.5X over its $17 IPO price fifteen months earlier. In a
literal sense, silicon valley had come to the silicon dunes of Lake Michigan,
as reflected in EMES’ valuation at 43X its LTM earnings.
Given the fact that EMES’ share
price had most recently risen by $100 or $2.5 billion of market
cap just since January 2014, the “momo” story was self-evidently
all about upside growth, not current profits or cash flow. In
fact, during its 14 quarters as a public filer, EMES had generated
negative $50 million of operating cash flow after CapEx. So at a total
enterprise value of $3.7 billion, the punters chasing the stock straight up the
parabolic curve would seemingly have anticipated some stupendous
growth indeed.
Except……except they had no idea
about EMES’ sustainable growth potential and didn’t care because the
buyers were robots, day traders and flavor-of-the-month hedge funds. They were
piling into the stock of a company selling a form (white sand) of the
second most abundant low-value commodity on planet earth for no other
reason than Emerge Energy Services was another momo play on steroids.
The “price action” was the investment thesis.
Yet this typical
momo “rip” had occurred not out of the natural elements of
human greed and capitalist enterprise, but because the stock
market has been destroyed by the Fed. That is, the combination of ZIRP and wealth effects
“puts” have eviscerated all of the checks and balances that contain and
modulate speculation in honest free markets.
----Yet owing to the Fed’s drastic financial repression and market manipulation, this downside insurance is dirt cheap—meaning that the net returns on momo-chasing are inordinately high due to the Fed’s implicit subsidy of their cost of doing business (i.e. hedging). Supernormal returns, in turn, attract ever greater sums of speculative capital, thereby providing even greater buying power to the momo trades.
There is no secret as to why
downside insurance is so heavily subsidized by the central banking branch
of the state and is therefore so cheaply available
to speculators. The absurd doctrine of “wealth effects” and the
implicit Greenspan/Bernanke/Yellen “put” has generated a toxic deformation in
the risk asset markets. Namely, the “buy-the-dips” reflex which has
purged volatility from the broad market index almost entirely.
The pattern below would never
occur in a honest free market. Nearly six straight years
of continuous vertical lift just wouldn’t happen in a setting where
the GDP of the underlying economy—US and Europe—-has grown virtually not at all
since 2007 pre-crisis level, and where earnings are facing massive headwinds
from global cooling, deflation and the heavy anchor of “peak debt”.
----But the worst of the market wrecking deformations attributable to Keynesian central banking is not simply the massive implicit subsidies to financial gamblers. Of even greater significance is the fact that no financial market can be healthy and balanced without an abundance of well-capitalized short-sellers. Yet the impact of financial repression has been the utter destruction of whatever short-sellers remained at the time of the financial crisis or their subsequent conversion to “blue pill” longs during the period since.
That proposition was
evident in spades in the case of EMES’ meteoric rise. At its late August
peak market capitalization of $3.5 billion, it had sported LTM earnings of just
$80 million. Yet it would not take more than 15 minutes of reflection to
recognize that even those meager profits represented the
whip-of-the-whip-of-the whip.
That is, frenzied credit pumping
and construction mania had driven the petroleum use rates of China and its
supplier satellites to unsustainable peaks, causing crude oil prices to rebound
from their post-crisis low of $35 per bbl. to $110. These credit bubble prices,
in turn, had attracted an enormous flow of cheap debt and capital into high
cost energy production—–most dramatically the US shale patch where production
rose from less than 1.0 million bbls/day prior to the crisis to more than
4.5 million per day by last fall.
In turn, the gusher of oil
coming out of the shale wells depended upon a massive prior injection of
sand—3 to 6 million pounds per well. This is designed to prop open
(hence “proppants”) the pores in the shale rock and keep the oil
flowing after fracking.
So “fracking sand” production
rose from about 14 billion pounds per year in 2007 to 50 billon pounds by 2011;
and then to 73 billion by 2013, with bullish estimates rising to
100 billion pounds by 2015 or shortly thereafter.
Needless to say, in another
example of the credit driven commodity price aberration where supply
temporarily lags an unnatural explosion of demand, the price for fracking
sand soared. From about $30 per ton in 2008, it rose to $45 per ton by
2012 and upwards of $80 per ton by mid-2014, with some trades already above the
$100 per ton level.
As a result, by mid-2014 sand
dunes had become the equivalent of gold mines. Marginal extraction costs of
around $25 per ton had rising only modestly, meaning that variable profits from
the fracking sand business had risen from under $5 per ton prior to the
shale boom to more than $50 per ton.
Stated differently, the reported
$80 million of EMES’ profits was perched way out on the end of a long whip of
windfalls. Most of Emerge Energy Services’ modest reported earnings, in
fact, were not economic profits at all; they represented transient
land rents generated by the global credit bubble.
Accordingly, the proposition
that EMES was worth 43X earnings had nothing to do with rational
calculation or honest price discovery. It was a pure artifact of the gambling
casino created by the Fed and the other money printing central banks.
More
In central banking as in diplomacy,
style, conservative tailoring, and an easy association with the affluent count
greatly and results far much less.
J. K. Galbraith.
At the Comex silver
depositories Friday final figures were: Registered 64.60 Moz, Eligible 110.92
Moz, Total 175.52 Moz.
Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally doubled
over.
The monthly Coppock Indicators finished December.
DJIA: +138 Up. NASDAQ: +247 Down. SP500: +198 Down.
No comments:
Post a Comment