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Last minute offer fails and Greece misses payment to the IMF; sees bailout program end

posted on June 30, 2015 at 6:45 pm
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Well, that didn’t work.

The last minute request by the Greek government for a delay in the 1.6 billion euro payment due to the International Monetary Fund today, for billions in debt relief, and for a new two-year bailout program went no where today. And Greece missed the deadline for repaying 1.6 billion euros to the International Monetary Fund. With the end of the day Greece’s existing bailout program expired.

Today’s last minute offer didn’t get any takers.

It was certainly an odd negotiating position.

It’s roughly equivalent to walking into a bank, pointing a loaded gun at your own head, and demanding “Give me all your cash or I’ll shoot.” The hope, a slim one, is that the bank will decide to hand over the money rather than watch you kill yourself.

In its last minute offer the Greek government asked for 30 billion euros in new funding under a new two-year bailout program, restructuring of the country’s debt, and an extension of the current bailout so that Greece wouldn’t miss payments due to the International Monetary Fund and the European Central Bank. The Greek proposal cites Articles 12 and 16 of the treaty that set up the European Stability Mechanism to deal with a financial crisis just like this one. But Article 16 also requires that any new bailout program must include a new memorandum of understanding. It’s exactly that kind of document that Greece and the EuroZone haven’t been able to negotiate in the recently ended talks.

What is the government of Greek Prime Minister Alexis Tsipras thinking

I can see two possibilities

First, it’s possible that Tsipras still believes that Germany, France, and the other EuroZone members are so afraid of Greece leaving the euro that they’ll give in. That would seem to be a misread of Germany’s Angela Merkel and the International Monetary Fund’s Christine Lagarde—and pretty much every other European leader or European Union official, and I don’t think Tsipras is that dense. (Merkel said today, for example, that there will be no negotiations before the referendum vote.

Second, it could be yet another cynical political ploy designed to manipulate the vote in the July 5 referendum. (Just to be clear the Greek government isn’t the only one playing cynical politics in order to appeal to Greek voters.) If, as is likely, Greece’s creditors turn down this last-minute offer, that would give the Tsipras government more evidence that its creditors are to blame for the breakdown of negotiations. And that might, the thinking could go, buttress the No vote on Sunday

So at the end of the day Greece missed its IMF payment. Tomorrow we move to a new stage in the end game to this crisis when the European Central Bank will decide what to do about supporting Greek banks.

European markets closed down but not with anything resembling yesterday’s plunge. The German DAX Index closed lower by 1.25% and the French CAC was down 1.13%. Spain’s IBEX 35 ended lower by 0.78% and Italy’s Milan market was off 0.48% at the close.

Shanghai enters a bear and that’s not good for global markets looking for an end to Greek-debt crisis plunge

posted on June 30, 2015 at 12:00 am
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Anyone looking to see whether financial markets are done tumbling as a result of the chaos in Greece and the possibility that the country will fall out of the euro after the July 5 referendum isn’t getting any solace from early trading today in China.

As of 10:40 Tuesday morning in Shanghai, the Shanghai Composite Index was down another 4.68%, falling to 3863 from Monday’s close at 4053. That was itself down from Friday’s close at 4193.

The Shanghai market, which had been flirting with a bear market, has now joined the Shenzhen and ChiNext markets in full bear mode. The index is now down 25.2% from its June 12 high.

What we’re seeing in China’s mainland markets is a wave of selling by traders who have bought stocks on margin.

Some of that selling is being driven by domestic forces—efforts by regulators to reduce shadow margin lending and fears by Chinese traders that the government isn’t going to support the market to the degree assumed just a few weeks ago.

But some of the selling is a reaction to global trends that say the financial markets are a riskier place than they seemed just a few weeks ago. Trends here include a sudden end to complacency over an eventual deal in the Greek debt crisis and a worry that, with a potential exit from the euro by Greece, we’ve entered uncharted territory. From this perspective, the continued plunge in mainland markets is of a piece with cash flows into the yen by traders looking for a safe haven and the drop in stock markets in Spain and Italy that accelerated at the end of Monday trading in Europe.

It’s always possible that European markets will bounce when they open on Tuesday, but I find it hard to see how any bounce could hold given the degree of uncertainty introduced into the financial markets there over the last few days. At the moment (11:15 p.m. Monday night in New York) it looks like Greece will miss the 1.6 billion euro payment to the International Monetary Fund due on June 30. (Which, technically, wouldn’t count as a default since a default needs to involve a private creditor instead of an agency such as the IMF.) Speculation will then turn to the European Central Bank decision on Wednesday about whether or not to continue the current emergency liquidity assistance program for Greek banks. On Monday the central bank refused a request from the Greek government for an addition 6 billion euros in assistance to Greek banks, but the ECB did keep the current credit line in effect. The read right now is that the central bank will keep that credit line intact on Wednesday because the alternative would be sending the Greek banking system into insolvency.

But unfortunately for the nerves of traders and investors that’s only a consensus market view and not a guarantee.

In the Greek debt crisis it’s now all about the July 5 referendum

posted on June 29, 2015 at 11:56 pm
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It’s now all up to the July 5 referendum but, as you might expect, the Greek government and its creditors don’t agree on what a No or Yes vote would mean.

Greek Prime Minister Alexis Tsipras is urging a No vote in the country’s July 5 referendum. A vote against accepting the latest terms on offer from the country’s creditors doesn’t mean that Greek would have to leave the EuroZone or the euro, he argues. A No vote would lead to the resumption of negotiations, the Prime Minister insists, with Greek negotiators speaking from a position of greater strength after Greek voters rejected the deal offered by creditors.

A No vote, the other 18 members of the EuroZone are warning, would mean a Greek exit from the euro. Germany’s leaders including Angela Merkel have been adamant today in casting the referendum as a Yes or No vote for either the euro or the return of the drachma.

A Yes vote, EuroZone leaders insisted today, is a pre-requisite for any resumption of negotiations.

Prime Minister Tsipras has said repeatedly before today that his government would respect a Yes vote and would implement any program required after that vote. But strongly voiced skepticism that creditors would believe anything promised by a Syriza led government has led to hints from Tsipras that he would resign after a Yes vote in favor of a new government of technicians to carry out an agreement.

The markets in Europe and elsewhere didn’t start the day in a positive mood but sentiment darkened as the trading day closed in Europe. The German DAX Index, for example, was down 2.66% near noon in New York but finished the day off 3.56%. The biggest equity retreat came in Italy—down 5.17% for the day in Milan—and Spin—where the IBEX 35 closed lower by 4.56%.

Markets around the world were unnerved by events in Greece—China’s Shenzhen Composite Index fell 5.78%–but it looks like the worry ended the day focused on what a Greek meltdown would mean for countries such as Italy and Spain that face their combination of large debt loads and sluggish growth.

Update Schlumberger

posted on June 28, 2015 at 4:03 pm
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Update January 20, 2015. Today, January 20, Schlumberger (SLB) announced that it will pay $1.7 billion for a 46% stake in Eurasia Drilling (EDCL in London), Russia’s largest drilling company. Schlumberger can buy the rest of Eurasia Drilling three years after the deal closes.

This is exactly the kind of long-term thinking that a patient investor with a long-term time horizon wants to see from a company. Schlumberger is able to look past the current plunge in oil prices and the current sanctions on Russia’s oil industry, imposed as a result of the war in Ukraine, to see the time when today’s oil surplus has again turned into a deficit and when the world is again willing to invest in tapping (and modernizing) Russia’s huge oil reserves.

But Schlumberger’s move throws the dilemma facing investors now into stark relief. Do you want to be; can you be as patient as Schlumberger? Current forecasts of oil prices suggest that markets won’t see a recovery in oil prices until the second half of 2015 and that even then the increase in oil prices might only be to $65 or $60 a barrel from the current $45 a barrel. And a number of forecasts predict that oil prices will stagnate or even retreat again in the first half of 2016 as oil that has been pumped into storage tanks and oil tankers comes back on the market in response to higher prices.

Wouldn’t it be better to wait until a mid-2015 recovery in oil prices is visible before buying Schlumberger? Or maybe even wait until that second dip, if it happens, in 2016?

What you think of Schlumberger (SLB) now depends on two things.

First, it depends on how far away you think any recovery is for oil prices and the oil industry. (For more on that topic see my January 14 post http://jubakam.com/2015/01/when-might-oil-bottom-how-fast-will-the-recovery-be-and-understanding-the-strange-economics-of-oil/ )

Second, it depends on your strategy for building an energy sector position for the eventual recovery in the sector. (Schlumberger is a member of both my Jubak’s Picks 12-18 month portfolio and my long-term Jubak Picks 50 portfolio http://jubakam.com/portfolios/ )

Let me start with the first “it depends” and then move onto “it depends” number 2.

On January 15, the company reported earnings of $1.50 a share for the fourth quarter of 2014—excluding “special items.” That $1.50 a share was 4 cents a share above Wall Street estimates. Revenue rose 6.2% year over year to $12.64 billion, matching the consensus from analysts.

Two caveats on that earnings beat, for course.

First, those “special items” for the quarter included a $1.77 billion pre-tax charge for cutting 9,000 jobs ($296 million) and an $806 million charge for writing down the value of offshore seismic survey ships. I’m not sure that I’d call these “special items” since that implies that they won’t be repeated next quarter and the quarter after that.

Second, those earnings and the earnings surprise are backward looking—that is, they reflect what Schlumberger’s business was like in the last three months of 2014. Here I’d pay special attention to the difference between Schlumberger’s confidence in its October guidance after third quarter earnings and the company’s clear expression of uncertainty in the January conference call.

In October Schlumberger said falling oil prices—what it characterized as fears of “short-term over-supply”–won’t have a significant impact on its business. “Our view of the overall market continues to include a mix of economic and geopolitical headwinds and tailwinds,” said CEO Paal Kibsgaard. (October’s guidance was itself quite different from the company’s June outlook, which was based on oil at $100 a barrel.)

The tone was markedly different in the company’s January 16 conference call. In that call Schlumberger said it anticipates lower spending by customers this year—which is why is cutting its workforce by 7%. “In this uncertain environment, we continue to focus on what we can control,” said CEO Kibsgaard. “We have already taken a number of actions to restructure and resize our organization.”

The problem facing Schlumberger, Wall Street analysts, and investors is that estimates of spending plans for 2015 are still a guess. Less than half of the 150 oil and gas companies it follows, Invesco portfolio manager Norman MacDonald told Bloomberg, have reported spending plans for the year. Competitor Halliburton (HAL), which reported on January 20, confirmed those negative trends in the market. The company, which has much more exposure to the North American market than Schlumberger does, reported that the drilling rig count has fallen by 15% recently in the United States and that it expects the rate of decline to accelerate.

Right now Wall Street analysts are projecting first quarter revenue of $113 billion for Schlumberger—which would be significantly lower than the $12.6 billion in the fourth quarter, and earnings per share of $1.16 vs. the $1.50 a share, before special items, in the just completed quarter.

So what do you do with Schlumberger?

I think the stock remains a core energy sector holding in a long-term portfolio. The company’s technology edge and its dominant market position in many of its markets haven’t been impaired during the current oil price plunge. Company management is correct in targeting this downturn in the sector as a time to pick up market share and I like the company’s attitude that the merger of Halliburton and Baker Hughes (BHI) is an opportunity to pick up market share. Schlumberger stays in my long tern Jubak 50 portfolio.

On the other hand, I think it’s worth re-evaluating Schlumberger’s role in a more aggressive, short to medium term portfolio. The very solidness that makes the stock such an attractive long-term holding means that it hasn’t declined as much (a good thing) as some of more leveraged and risky holdings in the sector—deep sea drillers such as Ensco (ESV) and SeaDrill (SDRL), for example—but that it won’t show as big a gain (a bad thing) when sometime after the middle of the year investors get evidence that the energy sector is rebounding and that some of the stocks that have been hammered hardest are about to show the biggest gains. At that moment I’d like to own shares that have been beaten down more and that have biggest upside (because of their higher current risk) than Schlumberger. To give me the cash to buy those short and medium term plays in June or so, I’d sell Schlumberger out of a short to medium term portfolio now. (So, yes, I will be selling Schlumberger out of Jubak’s Picks on Wednesday, January 21.)

Let me make clear the strategic assumptions behind this particular call on Schlumberger. I’m suggesting dividing your energy position into two pieces, one devoted to companies that are focused on using this down turn in the sector to increase dominant long-term positions and the other devoted to riskier shares that have been pounded more in this oil-price plunge and that, therefore have even bigger upside potential when this downturn ends. How you divide your own energy position between those two poles depends on your own risk/reward profile. I can see some investors going all for the Schlumbergers of the energy sector. I can see others with portfolios more heavily weighted toward the recently pounded.

Update Hi-Crush Partners

posted on June 28, 2015 at 3:55 pm
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Update: February 3. Today, February 3, before the New York market opened, Hi-Crush Partners (HCLP) reported earnings of 85 cents per unit in the fourth quarter of 2014. That was 5 cents a unit below the Wall Street consensus projection for the quarter. Revenue climbed to $`30.9 million, well above the $108.9 million expected by analysts. Revenue increased by 104% from the fourth quarter of 2013.

The units of this master limited partnership were up $2.52, or 7.75%, on the news as of 11 a.m. New York time.

Why the huge bump?

First, relief that the company came so close to earnings estimates at a moment when everybody is waiting for the bottom to fall out of the U.S. oil and natural gas from shale sector. Hi-Crush sells sand for use in fracking and it’s only reasonable to worry that demand and prices will fall as companies cut the number of rigs in use. Countering that logic, however, is the increased amount of sand being used per well as producers try to get more oil and natural gas out of each well in order to cut costs and increase production while drilling fewer new holes.

Second, a big increase in distributable cash flow to $32.7 million that leaves the master limited partnership with a distribution coverage of 1.31 times the $24.9 million in distributions scheduled to be paid to unit holders of record as of January 30 on February 13. In 2014 Hi-Crush increased its distributable cash flow by 60% and increased its distribution by 32%. The distribution on February 13 is an 8% increase from that for the third-quarter of 2014. Hi-Crush now yields 8.3%, a yield that reflects investor worry about the sustainability of distributions and distribution growth during the current plunge in oil prices.

Third, forward-looking statements from the company that stressed the stability of revenue for 2015. 88% of the company’s projected 2015 sand production is committed under long-term take-or-pay contracts. That’s down only slightly from the 90% under long-term take-or-pay contracts in 2014.

Hi-Crush isn’t by any means out of the woods and the longer oil prices stay below $60 a barrel, the more at risk its distribution is. (Continuing the recent rally in oil, West Texas Intermediate was up another 3.3% as of 11 a.m. in New York to $51.16 a barrel.)

Hi-Crush Partners is a member of my Dividend Income portfolio http://jubakam.com/portfolios/



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