Wednesday, January 21, 2015

2015 Outlook Part II

"The U.S. continues to be the brightest spot in the global economic outlook," declared the Cornell’s Steve Kyle on December 9 at the annual Agribusiness Economic Outlook Conference. "But we need to reduce the drag caused by fiscal policy while avoiding a premature tightening of monetary policy." Steve Kyle is the Director of Graduate Studies at Cornell University School of Economics.

Kyle’s predictions for 2015:

• Another year of 3 percent growth in U.S. Gross Domestic Product.

• Unemployment to drop to 5.5 percent, perhaps as low as 5 percent in 2015.

• Inflation will remain at its current, negligible level.

• Interest rates should remain near zero - Though long rates may creep up.

• Fiscal policy is always "the big uncertainty," says Kyle "Let’s hope for a bit of willingness to spend since we need it and it isn’t an election year."

• Regarding Europe, Kyle said there’s "no hope for relief as long as their political establishment remains wedded to austerity."

. . . . and Five Possible Surprises
1. Europe is the new Japan. Despite their negative demographic trends, investors hope for mean-ingful improvement in their economies as they reap the benefits from low currencies & cheap oil. However, stocks in these markets are probably better to rent vs. own.
2. The Hong Kong government will be faced with increased protests for the right to choose inde-pendent candidates. The HK stock market lags while the markets in Singapore and Shanghai begin to rebound.

3. The U.S. Federal reserve continues to maintain a low interest rate policy through most of the year.

4. Crude oil prices stage only slight rebounds before stabilizing in the mid-$60 range. Meanwhile, the economic benefits of low oil prices continue to gain momentum. The U.S. approves the Key-stone pipeline project, which keeps speculators from investing in oil.
5. The U.S. stock market continues its strong performance based on improved economic growth resulting from low oil prices. Analysts project 1/3% growth for the U.S. Gross Domestic Product (GDP) for every sustainable $10 decline per barrel of oil.* The financial and consumer sectors assume stock market leadership positions from utility and healthcare sectors.

Friday, January 9, 2015

2015 Outlook Part I

Despite a few hair-raising bouts of volatility, including a 7% dip in October due to the Ebola virus scare, 2014 was good year for investors. The well-known stock market index, the Dow Jones Industrial Average was up 7.5% for the year. The S&P 500 Index rose by 11% and the Russell 2000 index of smaller stocks gained 3.6%. It was more difficult to post gains outside the U.S. as the average foreign-stock mutual fund lost about 4% for the year.

In the fixed income markets, high quality bonds trounced high yield bond funds, which were hurt by the decline in the energy sector. The average fixed income fund in the government bond sector rose about 4%, counting interest earned and appreciation. However, lower rated corporate bond funds posted negative returns for the year.

Will stocks continue to rise after two consecutive strong years? No one can predict, with reliability, where the stock market is going in the short-term. While avoiding predictions, current economic trends are poised to continue to improve. For instance, there are indications that low interest rates combined with the low fuel prices could provide a growth spurt for the U.S. and perhaps even in Europe. Therefore, global (larger) companies will likely benefit (profit). Another important indicator is the Federal Reserve’s policy to finally change its ultra-low interest rate policy. The bad news is that this will affect mortgage rates, which, in turn, will impact the housing market. The good news from an investor's point of view, is that rising rates mean that better yields will be available in the bond market.

Even if changes in Fed policies lead to temporary volatility in the equity and fixed income markets, the reason the Fed is unwinding its stimulus is because the economy is doing well and is expected to accelerate.

Taken altogether, current economic trends appear favorable. Fourth quarter GDP growth was recently pegged at an annualized growth rate of 5% - nearly double the average of recent years. Inflation remains low, running around 1%. Consumer spending, a huge part of GDP, continues to increase as employment recovers. All in all, a good foundation to begin the New Year.

Friday, December 26, 2014

Oil Companies Look to Sell Off Assets to Raise Cash

Last month oil prices dropped to their lowest level in five years. Meanwhile, the cost to borrow money is rising rapidly.

 For cash-strapped companies, the message from analysts is to downsize to ride out what is expected to be a rough year ahead. The uncertainty for the near and longer term outlook for the price is making this situation a bit more tenuous than in the past.

Industry insiders are saying that it increasingly difficult for companies to shed assets. "Right now there’s a price disconnect between what people want to pay and what they’re willing to sell for. A lot of people are circling each other," said Rob Little, a Dallas attorney with Gibson Dunn & Crutcher.
This fall, as the decline in crude prices was beginning to sink in, companies were still announcing a steady stream of deals designed to prop up their balance sheets.

Irving-based Pioneer Natural Resources sold off its natural gas wells in North Texas and pipeline business in the Eagle Ford to focus, it said, on drilling in West Texas.

Likewise, Apache Corp. in Houston announced the sale of $1.4 billion of assets in Louisiana, Oklahoma and Texas. On Nov. 17, the oilfield services company Baker Hughes in Houston announced it was merging into rival Halliburton in a $34.6 billion deal.

That day West Texas Intermediate, the U.S. benchmark crude, was trading for $75 a barrel, and many believed that was where the price would stay. Except on Thanksgiving Day, the Organization of Petroleum Exporting Countries announced it would not, as widely anticipated, cut production. That set off a panic that saw U.S. oil prices fall to $55 within two weeks, bringing the total decline to close to 50 percent since late July.

In Houston, Ken Olive has been brokering deals through the Oil & Gas Asset Clearing House for more than two decades. The firm does about 120 sales a month on average, but that number has plummeted since Thanksgiving, he said. Deals that were in the works for two months, which Olive declined to name, were suddenly pulled at the last minute.

“It was interesting because in November, when oil prices had dropped roughly to $75, the market was still robust,” Olive said. “Sellers had adjusted mentally to the fact they were going to have to adjust their expectations on what they could sell their assets for. But once they came down to $60, we found that was a much harder leap for sellers to make and be willing to come off their price.”
There is no shortage of willing participants.

Companies including the European oil giant Shell and Transocean, the largest offshore drilling rig operator in the world, are actively trying to sell off assets as they come under pressure from investors. On the other side, some investment firms are lining up to buy into businesses at what they perceive to be a steep discount.

"There are a lot of people who borrowed a lot of money based on higher price levels, and they’re going to need more capital," Blackstone CEO Stephen Schwarzman said during a conference earlier this month. "There’s going to be a fallout. It’s going to be one of the best opportunities we’ve had in many, many years."

Only the sharp drop in asset prices, as much as 25 percent in less proven oil fields, is holding up any deals that might have materialized, said Stephen Straty, an investment banker with Jefferies & Co.
If oil prices stay where they are, the expectation is that the current freeze will quickly thaw next year as companies have little choice but to sell.

Over the past 18 months, asset sales have become more prevalent as companies have come under pressure from investors who demand increased shareholder returns. Now those that didn’t sell off assets will be forced to, said Phil Adams, senior bond analyst with the research firm Gimme Credit.

“With the collapse in oil prices, you’re going to see a bunch of asset sales from sub-investment-grade guys who have to sell. Then it’s like elephants through the keyhole because everyone is trying to sell,” Adams said.

Saturday, December 6, 2014

Unintended Consequence of Falling Oil

Before oil prices began their plunge this summer, energy-focused private-equity funds had outperformed general private-equity funds over the past decade, returning about 16.5% annually, after fees, compared with 14% for the general funds, according to Cambridge Associates LLC. The big returns prompted private-equity investors to double down on drilling.
Nearly $100 billion has been pumped into energy funds since 2011, according to data provider Preqin.
For most of the year, private-equity firms ran into each other in auctions bidding up prices for drilling properties that big oil companies sold. Through mid-October, private-equity firms had been the buyers of roughly a third of the $54 billion of U.S. onshore oil and gas fields, according to RBC Richardson Barr, a Houston unit of Royal Bank of Canada. As oil’s slide steepened, the deal market slowed, though.
Private-equity firms sized up California oil fields that Freeport-McMoRan Inc. shopped recently, according to people familiar with the matter. Some of the suitors gave up pursuit of the properties valued at $5 billion because they were unable to borrow enough of the purchase price to earn the profits they were after, the people familiar with the matter said.
As for done deals, private-equity firms often have some protection.
Even as they were downgrading Laredo’s stock to “neutral” from “overweight,” Simmons & Co. International analysts last month said the Tulsa, Okla., company “has a number of things working for it,” including the $88 dollars a barrel it will get for most of the oil it pumps next year. Laredo has hedged about 85% of its expected output in 2015, which is well above the 35% average for other energy producers it studies, the investment bank said.
Warburg and its investors, which spent about $600 million launching Laredo, have already pocketed about $1 billion from the investment, so proceeds from any shares the firm still owns is gravy.
EP Energy, which has also hedged much of its near-term output, is basically a break-even deal for Apollo at the current share price, down from about double the firm’s money when it sold shares in its January initial public offering. “We feel good about the long-term prospects of that investment,” said Mr. Harris, the Apollo co-founder.
And despite Antero’s recent slide, which has lopped about $4 billion since June off the shares still held by Warburg and partners Trilantic Capital Partners and Yorktown Energy Partners, the investment firms have already pocketed about $1 billion on their roughly $1.5 billion investment in the Denver company.