David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Email of the day on the lack of volatility

    Hope all is well with you and family .  What do you make of the markets lack of volatility and remarkable resilience in the face of all the geopolitical risks that are occurring.  Is it because everyone is stuck in passive index funds?  Doesn't it make the rollover when it occurs more severe?  Maybe I'm getting old.

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    Musings From the Oil Patch April 18th 2017

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

    The worst downturn in the history of the oil industry has been followed by the fastest drilling rig recovery in history. From massive layoffs and corporate restructurings, oil and gas and along with oilfield service companies have had to switch gears and figure out how quickly and profitably they can grow along with the current recovery. As someone mentioned, the industry has crammed a year’s worth of rig activity growth into a few months – something that is creating a challenge for the oilfield industry. 

    As the energy companies are about to start reporting financial results for the January - March 2017 period, numerous oilfield service company managements have already signaled that the numbers will likely not reflect the levels of profitability Wall Street analysts had expected due to the costs of responding to the explosion in activity, especially following OPEC’s surprise output cut to help drive a recovery in oil prices. From the rapid climb in the rig count, it is clear that not only had investors and analysts bought into the recovery scenario, but so too had exploration and production (E&P) company managements. 

    There is an expression in English literature that “all things come to those who wait,” but that isn’t the case in the oil patch – especially if one wants to make money. In reality, the expression “the early bird gets the worm” is more appropriate to describe how people in the E&P business operate, but it is taking a toll on the pace of the recovery in oilfield service company profits. Service company managers have had to spend money to reactivate equipment and re-crew them before they can actually earn revenue. The more aggressive a company has been, or is, in ramping up its idle equipment, the greater are the costs incurred. At the present time, everyone is comfortable in the belief that the delay in gratification – increased profits – will be worth the effort, and the wait. Whether that proves a correct assumption or not will depend on how the recovery continues unfolding and what happens to well costs, which is what is driving the increased activity. Everyone has to make money going forward for the recovery to be sustained. That doesn’t mean, however, that everyone will enjoy the levels of profitability experienced during the era of $100+ a barrel oil prices. But, unless people make money, the industry will not be able to support additional activity, or possibly even support the current level of work. So where are we in this recovery?


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    Gigantic Wind Turbines Signal Era of Subsidy-Free Green Power

    Here is the opening of this encouraging article from Bloomberg:

    Offshore wind turbines are about to become higher than the Eiffel Tower, allowing the industry to supply subsidy-free clean power to the grid on a massive scale for the first time.

    Manufacturers led by Siemens AG are working to almost double the capacity of the current range of turbines, which already have wing spans that surpass those of the largest jumbo jets. The expectation those machines will be on the market by 2025 was at the heart of contracts won by German and Danish developers last week to supply electricity from offshore wind farms at market prices by 2025.

    Just three years ago, offshore wind was a fringe technology more expensive than nuclear reactors and sometimes twice the cost of turbines planted on land. The fact that developers such as Energie Baden-Wuerttemberg AG and Dong Energy A/S are offering to plant giant turbines in stormy seas without government support show the economics of the energy business are shifting quicker than anyone thought possible -- and adding competitive pressure on the dominant power generation fuels coal and natural gas.

    “Dong and EnBW are banking on turbines that are three to four times bigger than those today,” said Keegan Kruger, analyst at Bloomberg New Energy Finance. “They will be crucial to bringing down the cost of energy.”

    About 50 miles (80 kilometers) off the coastline in the German North Sea, where the local fish and seagulls don’t complain about the view of turbines in their back yards, offshore wind technology is limited only to how big the turbines can grow. Dong has said it expects machines able to produce 13 to 15 megawatts each for its projects when they’re due to be completed in the middle of the next decade -- much bigger than the 8-megawatt machines on the market now.

    Just one giant 15-megawatt turbine would produce power more cheaply than five 3-megawatt machines, or even two with an 8-megawatt capacity. That’s because bigger turbines can produce the same power from a fewer number of foundations and less complex grid connections. The wind farm’s layout can be made more efficient, and fewer machines means less maintenance.

    “Right now, we are developing a bigger turbine,” said Bent Christensen, head of cost of energy at Siemens Wind Power A/S, in a phone interview. “But how big it will be we don’t know yet.”

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    The EU Brexit Strategy Is to Play for Time

    A leaked European Union paper outlining the bloc's initial negotiating position in Brexit talks hints at a clever zero-sum strategy. The EU's main goal is to deter other potential exiters and offload all the anxiety about the truly important issues in the divorce on the U.K. alone.

    The paper (actually called a "non-paper" in EU parlance because it's still a draft) makes it clear that the EU wants to negotiate Britain's departure in stages. Just two contentious issues are to be addressed in Stage One: the treatment of EU citizens now living in the U.K. and the bill to be settled by the departing country. Essentially, the U.K. will be told that if it wants any kind of closure on a trade deal, it first needs to take care of the EU migrants and agree to pay a large sum of money (in euros, please) to honor previous commitments and move London-based EU agencies elsewhere. 

    At the same time, the initial EU position makes agreement on both issues as difficult as possible. For the 3.5 million EU citizens living in Britain, including more than 900,000 Poles and more than half a million other eastern Europeans, the bloc wants a lifelong right to live and work in the U.K. on the same basis as locals; these EU citizens would also retain the right to claim U.K. benefits for children living in other countries, bring over relatives and confer resident status on third party nationals through marriage. And they would also be subject to the jurisdiction of European courts.

    That won't be easy for Prime Minister Theresa May to swallow, even if she gets a decisive mandate in the June election. Immigration was a major issue for voters who backed Brexit. The government may argue that "grandfathering" the immigrants already in the U.K. is the lesser evil, but to the anti-foreigner voters this means the current situation -- the one that angered them in the first place -- will be frozen for decades.

    In the letter May sent EU leaders when activating the Brexit procedure she, too, stressed the need for an early deal on EU citizens in the U.K., and U.K. citizens in the EU -- about 1.2 million people, many of them retirees in Spain and France. But the divergent nature of the two groups of migrants makes the EU's demands far weightier than the U.K.'s. EU workers in the U.K. are young, often needy and far more numerous, especially taking into account possible family reunification. There is no easy compromise to be reached, and that suits the EU fine. As the bigger trading partner that stands to lose less if there is no resulting trade deal, time is on its side.

    Concerning the exit payment, the EU paper also lays out an extreme position: The bloc is going for a one-time pay-out big enough to anchor the expectations of other countries that may try to leave the union; and there's no mention of handing over its share of EU assets. No future campaign based on promises to invest in health care instead of contributing to the EU budget will fly if negotiators attain this goal. 

    There is also no reason for EU negotiators to compromise here. Though Brexit leaves a hole in the union's budget, no political constituency important to the negotiators will be seriously hurt. A strong deterrent to more renegades is more important.

    There's nothing expressly malicious in the bloc's initial negotiating position. The union is confidently laying its cards on the table; its position will likely be highly public throughout the process (there's hardly a choice given the many potential sources of leaks), while the U.K., under more pressure to make compromises, isn't likely to be as forthcoming.

    The longer that game goes on, the better for the EU's cause of maintaining unity and discouraging further secession. With 27 member states, there's always a big election somewhere: In France right now, in Germany later this year, in Italy sometime soon. For pro-EU forces running in these elections, the more uncomfortable Brexit looks, the better.

    A temporary extension of the U.K.'s membership, explicitly mentioned in draft negotiation guidelines the European Commission has written up for the bloc's Council of Ministers, would be a godsend to these centrist political forces: It would show that leaving is a cumbersome process that's far easier to initiate than to pursue, and that the two-year time frame that exists for it is unrealistic. A transition arrangement that drags on and becomes semi-permanent doesn't cost the EU anything, but it will likely hurt May's government badly.

    If the EU knows how to do anything, it's to draw out inconclusive negotiations. That can be a useful skill.

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    Steven Mnuchin Talk of Tax Plan Soon Stirs Markets and Skeptics

    Here is the opening of this topical article from Bloomberg:

    Treasury Secretary Steven Mnuchin sent U.S. stock prices to a daytime high Thursday when he said the Trump administration will produce an ambitious plan to overhaul the U.S. tax code “soon.”

    But it’s not the first time the administration has promised an imminent plan, and the obstacles to a sweeping tax-code rewrite of the sort Mnuchin described Thursday haven’t gotten any smaller. A key Senate committee has yet to see final details of a White House plan, a congressional aide said. And tax-related challenges presented by the 2010 Affordable Care Act remain in place amid Republicans’ disagreement on how to dismantle the health-care law they’ve criticized for years.

    On top of that, House Speaker Paul Ryan’s proposal to tax U.S. companies’ domestic sales and imports -- while exempting their exports -- has stirred controversy among U.S. businesses, created conflict among Republicans and has yet to win President Donald Trump’s endorsement.

    So even as stock traders welcomed Mnuchin’s pledge to enact comprehensive tax legislation before the end of this year, skeptics questioned the prospect.

    “Clearly they’re saying what they’d like to believe is true,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a progressive policy group in Washington. “We now know that we must heavily discount their assertions,” said Bernstein, who served as former Vice President Joe Biden’s chief economic adviser.

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    Britain Led by Theresa May Will Become a European Haven of Order and Calm

    Assuming that Theresa May wins a landslide victory on June 8, she will be the only leader of a major EU state with a crushing mandate and the backing of a unified parliamentary phalanx.

    All others will be in varying states of internal disarray. None will have a workable majority in parliament. Bitter internal disputes will continue to fester over the loss of democratic control under monetary union, whether or not eurosceptic parties actually come to power.

    This gives the Prime Minister formidable clout. We have moved a long way from the first chaotic weeks after the referendum when Belgian premier Charles Michel could suggest in all seriousness that the British institutional system was disintegrating, a country led by populist dreamers, disappearing into a "black hole". Such was the view in Brussels.

    The tables have since turned. Britain will enter the Brexit talks led by an ancient and disciplined party of great governing credibility - solid on NATO, free trade, climate accords, and liberal principles - with UKIP and the ephemeral forces of populism scattered to the four winds.

    Discord lies on the other side of the Channel. Let us suppose that the ardent Europeanist Emmanuel Macron makes it through to the presidential run-off in the French elections on Sunday - far from certain - and therefore captures the Elysee two weeks later. How is he going to govern and reform France?

    His manifesto is studiously vague. The French parliament will be split five ways and Balkanized. Anti-EU candidates from hard-Left to hard-Right have garnered half the support in this extraordinary campaign, united on core complaints that the EU has eviscerated French sovereignty and that the euro has become a cloak for German interests.

    There is much hope in French progressive circles that Mr Macron will be able to rebuild the eurozone on better foundations with a putative Chancellor Martin Schulz in Germany. Even if Mr Schulz were to beat Angela Merkel in October, this would be wishful thinking.

    There is scant difference between the German Social Democrats and Christian Democrats on euro ideology. Both are captive to mercantilist thinking. Both think Germany's current account surplus of 8.5pc of GDP is a virtue. Both are opposed to fiscal union and pooling of debts. Both are wedded to creditor interests. There is only a German view.

    Italy above all is a political accident waiting to happen. Beppe Grillo's Five Star movement leads the polls by a staggering eight percentage points. It has suffered no erosion after its latest plans for a parallel "fiscal currency", a Trojan horse for the lira.

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    Why the Market for Fossil Fuels Is All Burnt Out

    If Helm is to be believed the oil market downturn is only getting started. The latest collapse is the harbinger of a global energy revolution which could spell the end-game for fossil fuels. These theories were laughable less than a decade ago when oil prices grazed highs of more than $140 a barrel. But the burn out of the oil industry is approaching quicker than was first thought, and the most senior leaders within the industry are beginning to take note.

    In the past, the International Energy Agency (IEA) has faced down criticism that its global energy market forecasts have overestimated the role of oil and underplayed the boom in renewable energy sources. But last month the tone changed. The agency warned oil and gas companies that failing to adapt to the climate policy shift away from fossil fuels and towards cleaner energy would leave a total of $1 trillion in oil assets and $300bn in natural gas assets stranded.

    For oil companies who heed Helm’s advice, the route ahead is a ruthless harvest-and-exit strategy. This would mean an aggressive slashing of capital expenditure, pumping of remaining oil reserves while keeping costs to the floor and paying out very high dividends.

    “They’d never do it because no company board would contemplate running a smaller company tomorrow than today. It’s not in the zeitgeist of the corporate world we’re in, but that’s what they should do,” Helm says.

    BP and Royal Dutch Shell are slowly shifting from oil to gas and making even more tentative steps in the direction of low-carbon energy. But Helm is not entirely convinced that oil companies have grasped the speed with which the industry is undergoing irrevocable change.

    “As the oil price fell, at each point, oil executives said that the price would go back up again,” says Helm. “What the oil companies did was borrow to pay their dividends on the assumption that this is a temporary problem. It’s my view that it is permanent,” he adds.

    For a start, there is scant precedent for the price highs of recent decades. Between 1900 to the late Sixties oil prices fluctuated in a range between $15 a barrel to just above $30 a barrel – even through two world wars, population growth and a revolution in transport and industry.

    It was geopolitical events which caused oil prices to surge by more than $100 a barrel following the Middle East oil embargoes of the late sixties and early seventies. They collapsed back to $20 by the Eighties.

    So, what drove oil prices to the heady levels of $140 a barrel just less than 10 years ago?

    “China,” says Helm, barely missing a beat. “If you look at both the rapid growth in emissions and the rapid growth of oil, fossil fuel and all commodity prices, it was while China was doubling its economy every seven years. This is a phenomenal rate.

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    The Nightmare Scenario for Florida Costal Homeowners

    Here is an early section of this somewhat factual report from Bloomberg:

    If property values start to fall, Cason said, banks could stop writing 30-year mortgages for coastal homes, shrinking the pool of able buyers and sending prices lower still. Those properties make up a quarter of the city’s tax base; if that revenue fell, the city would struggle to provide the services that make it such a desirable place to live, causing more sales and another drop in revenue.

    And all of that could happen before the rising sea consumes a single home.

    As President Donald Trump proposes dismantling federal programs aimed at cutting greenhouse gas emissions, officials and residents in South Florida are grappling with the risk that climate change could drag down housing markets. Relative sea levels in South Florida are roughly four inches higher now than in 1992. The National Oceanic and Atmospheric Administration predicts sea levels will rise as much as three feet in Miami by 2060. By the end of the century, according to projections by Zillow, some 934,000 existing Florida properties, worth more than $400 billion, are at risk of being submerged.

    The impact is already being felt in South Florida. Tidal flooding now predictably drenches inland streets, even when the sun is out, thanks to the region’s porous limestone bedrock. Saltwater is creeping into the drinking water supply. The area’s drainage canals rely on gravity; as oceans rise, the water utility has had to install giant pumps to push water out to the ocean.

    The effects of climate-driven price drops could ripple across the economy, and eventually force the federal government to decide what is owed to people whose home values are ruined by climate change.

    Sean Becketti, the chief economist at Freddie Mac, warned in a report last year of a housing crisis for coastal areas more severe than the Great Recession, one that could spread through banks, insurers and other industries. And, unlike the recession, there’s no hope of a bounce back in property values.

    Citing Florida as a chief example, he wondered if values would decline gradually or precipitously. Will the catalyst be a bank refusing to issue a mortgage? Will it be an insurer refusing to issue a policy? Or, he asked, “Will the trigger be one or two homeowners who decide to sell defensively?” 

    “Nobody thinks it’s coming as fast as it is,” said Dan Kipnis, the chairman of Miami Beach’s Marine and Waterfront Protection Authority, who has been trying to find a buyer for his home in Miami Beach for almost a year, and has already lowered his asking price twice.

    Some South Florida homeowners, stuck in a twist on the prisoner’s dilemma, are deciding to sell now—not necessarily because they want to move, but because they’re worried their neighbors will sell first.

    When Nancy Lee sold her house last summer in Aventura, halfway between Miami and Fort Lauderdale, it wasn’t because she was worried about sea-level rise, rising insurance costs, nuisance impacts or any of the other risks associated with climate change. Rather, she worried those risks would soon push other people to sell their homes, crashing the region’s property values. So she decided to pull the trigger

    “I didn’t want to be there when prices fell,” said Lee, an environmental writer.

    Ross Hancock has the same worry, and sold his four-bedroom house in Coral Gables three years ago. He described South Florida’s real estate market as “pessimists selling to optimists,” and said he wanted to cash out while the latter still outnumbered the former.

    “I was just worried about my life’s savings,” Hancock said. “You can’t fight Mother Nature.”


    A short drive through mangrove trees off Highway 1 in Key Largo, Stephanie Russo’s house backs onto a canal that opens into Blackwater Sound, and from there to the ocean; her neighbors lounge in shorts and flip-flops beside their boats.
    A few months after Russo, a partner at a law firm in Miami, moved to Key Largo in 2015, the big fall tides brought 18 inches of water onto the road in front of their house. Unlike previous tidal floods, this one lasted 34 days.

    “When we bought, there hadn’t been a flood like that for years,” said Russo, who was sitting at a table between the home’s outdoor bar and its pool.

    “Ever,” interjected her husband Frank, who was working on the grill.

    The saltwater ruined cars around the neighborhood, destroyed landscaping and sparked a mosquito infestation.
    But the worst part might have been the trash.

    “When people would drive, it creates a wake,” said Russo. “That knocks over all the garbage cans, and then everybody’s garbage is floating in the streets, and in the mangroves. It’s just disgusting.”

    Officials in Monroe County agree there’s a problem, and plan to raise some roads in an attempt to reduce future flooding.

    Russo says if she knew in 2015 what she knows now, she wouldn’t have purchased the house. People buying in her neighborhood today are probably just as clueless as she once was, she guesses. “I would bet money that the realtors are not telling them.”

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