U.S. stocks are up. Almost every other stock market is down.
Strange day.
True, U.S. economic data was sort of good this morning. April pending home sales increased by 6%, way above the consensus of 4.3% growth. Revised March numbers showed a 7.1% increase instead of the 5.3% initially reported.
But nobody really trusts those numbers. The big surge in pending home sales in March and April was almost certainly a rush to beat the April 30 deadline for a tax credit for home buyers.
But as I’ve said repeatedly to outperform a stock market doesn’t have to be reporting good news; it simply has to be reporting less bad news that competing markets.
News from Europe and Japan today certainly wouldn’t make me rush to put money to work in those markets. (For more on political problems in Japan and Spain, see my post https://jubakpicks.com/2010/06/02/add-rising-political-risk-from-japan-and-spain-to-the-global-toxic-brew/ )
China is stuck in neutral as everyone waits to see what the government will do about starting a property tax. And the rest of Asia (and Australia too) is coping with a mix of good news on economic growth and worry about rising inflation and climbing interest rates.
The combination of decent U.S. growth with a central bank that’s quarters away from raising interest rates looks pretty good in comparison.
 The strength in the U.S. stock market isn’t enough to move the major indexes out of the danger zone: most of them are still either below support at the 200-day-moving average or threatening to break below that line. That doesn’t argue for a big rally from here.
But still even holding at these levels would be an achievement considering the state of global financial markets.
southof8,
I was suggesting BP could potentially capture 5,000-10,000 barrels of oil a day from the leaking wellhead, not that the range was the amount of leaking from the wellhead.
EdMcGon,
I think you’re looking at the wrong companies to compare BP to. The key with the companies you mentioned (ML, MCI, Enron) is that they used clever accounting to conceal billions in liabilities which ultimately doomed the companies. BP’s future liabilities for this spill can be contested in court; they aren’t stuck holding a huge pool of illiquid assets. Rather, BP has a a daily production of 3.95 million barrels of oil, an asset base which they can always find a buyer for. Why the concern about nationalization? The company isn’t threatened by the cost of this disaster, again because the litigation is going to be spread over decades. Exxon was able to get much of the initial penalties imposed on it from the Valdez spill by court decisions overturned and lowered in the 15+ years of legal wrangling afterwards. Again, BP had almost $300 billion in revenue last year, so a multi-billion dollar penalty against it really isn’t a big deal.
southof8,
Do you remember what our government did to Bank of America, basically forcing them to buy Merrill Lynch? Don’t think for a second that Obama’s gang wouldn’t use every bit of leverage they could on BP to make life totally insufferable for the company. And with a screaming mad public, anything Obama does to BP would have popular support.
BP is politically radioactive at the moment. BP is about to face a political lynching that is going to hurt bad. Don’t look at their book value now, because that is about to take a severe hit.
If you’d like a long term prediction for BP, I see their stock dropping to penny stock level before someone buys them out, similar to what happened to MCI (bought out by Verizon) and Metropolitan Edison (of Three Mile Island fame, several acquisitions later owned by FirstEnergy). Basically, BP will have to become cheap enough for a potential acquirer to overlook the costs of litigation going forward.
One other possibility for BP is an Enron-style bankruptcy and liquidation.
But don’t look at this in the same terms as the Exxon Valdez incident. This is FAR worse. The Valdez was an environmental disaster, but it effected very few people. After the government gets done with BP, the tort lawyers will pick over the bones of whatever is left of BP.
BP is literally a dead company still in business.
As for RIG and the other companies involved, they might actually pull out of this ok in the long run. BP is being made the political face of this disaster.
Yclept,
Arbitrage is the practice of taking advantage of price differences between different markets for profit. As such, what you’re describing is not arbitrage, it is inflation — a rise in price of the same (or equivalent) products over time.
I agree with you – inflation will make the cost to develop real estate rise over time.
But be careful – real estate prices are not determined by the cost of developing the property. Just because the cost of developing the real estate increases, the value of the real estate will not necessarily increase as well. Expanding the principle to the general case, the value of a good is not determined by its cost. I could build a very elaborate, expensive contraption that provides no value to its owner, but I would not be able to sell it for a profit. The consumer doesn’t care how much money I spent to make it, he only cares what value it provides to him.
I assume you are an investor. As such, I hope you are doing fair value calculations for equities you buy. Real estate is no different and governed by the same fundamental principles. You should be able to compare real estate value the same way as you do equities. The value of real estate is the net present value of the future rents (minus maintenance and taxes). Think of it this way — if you were a landlord, what value would owning the property bring you? If you were to sell it, what price would you demand?
The cost to build will surely go up in Greece, for instance, due to increased raw material prices due to increasing worldwide demand. However, if the Greek economy has an extended recession, rents will not be able to increase, and may even fall. The decreasing ability to extract rents from the property will cause the real estate value to decline, even if the cost to develop the property continues to increase.
I personally only like real estate in locations where rents (read, wages) are rising faster than the economy in general, or where prices are significantly below fair value.
RMdame- there is no chance that well is pumping 5000 barrels a day. Not in BP’s wildest dreams. Try 20,000 barrels. But your point is still well taken- the hit to the stock is panic selling.
Mr. Market is indeed depressed and inconsolable. Disrobe him. And I also own Altria. PM too. I completely agree with your analogy- it is spot on.
Jim’s latest post on the disaster is up on MSN so I’ll reserve most of my thoughts for a response to that post later.
But Ed:
BP has shaved multiples of what your talking about in losses from the Horizon spill. And whatever congress does, it cannot ex post facto impose liability for the spill. RIG has shaved about as much, with very little liability.
I’ve started nibbling and I’m fairlly bearish on the overall market. You asked me last week, in a great qeuestion, what’s the up from the bottom, rather than down from the top. At the bottom in early 2009, RIG was at 47. That’s the bottom. it hit that yesterday and started coming up. Might it drop marginally below that? Sure. But it’s got the biggest collection of deep water drilling rigs, and that’s where all the oil is being found.
You really think we’re turning into a nuclear and solar powered world in the next ten years?
I live in So Cal. I can see the ocean as I write this. There will never be offshore drilling in California. And RIG is a screaming bargain, and BP is too. Even though that well will pump oil into the gulf through Labor day. The future is two wells for every one well- one for the oil and one for the relief valve when the idiots drilling the oil well fuck it up because they’re greedy, ala BP on the Horizon. All the more reason to buy drillers.
Yes, I own RIG. And buying more.
That’s my point: the litigation is going to be spread over decades, not condensed into a single year where all damages have to be paid. I see a parallel between the situation BP is in now and the situation the domestic tobacco companies were in prior to the MSA. There was a huge amount of skepticism about whether or not the domestic tobacco market would survive the onslaught of both “Operation Berkshire” being made public and the massive amount of research that finally broke in the late 1990s linking cigarettes to a whole host of illnesses. The tobacco companies ended up amortizing a settlement with state governments, and were then allowed to employ a scorched earth litigation policy regarding suits brought by smokers: fight every claim through every available legal channel as long as possible (same basic idea Exxon used after the Valdez wreck). And then, Altria went on to post a 300% gain in share price between 1999 and 2009…..weird for a company that was “doomed” just a decade ago. The cost of decades of litigation (employing lawyers etc.) will cost far less than the potential damages awarded against BP, all the while BP will still be pumping oil and natural gas around the world and enjoying the associated profits.
Maybe BP will finally drop the ridiculous “Beyond Petroleum” campaign? They’re an oil company and need to act accordingly.
Disclosure time: I own Exxon and Altria stock.
rmdame,
Congress is currently debating a bill which would remove the legal liability for damage from oil spills (currently set at $750 million). I’m not sure if you’re familiar with the history of asbestos litigation, but if Congress removes this cap then BP could be in for decades spent on litigation.
In effect, this action by Congress would unleash a tort storm on BP that not even all their oil profits could ever support.
Please don’t misunderstand me. I don’t think BP deserves this. However, that is where they are at. I’m not buying.
EdMcGon,
I actually work in the oil industry, so I thought I’d share my two cents, as all of the talk about how dire this situation is for BP is driving me crazy, mainly the scale of BP versus the scale of the oil spill:
BP has $7 billion in cash, and reported net income of about $16 billion last year, with $40 billion of earnings (before taxes) over TTM. BP roughly paid $650 million in interest expenses last year, and enjoys a decent credit rating from the agencies (even with recent credit downgrade). Should BP need to tap the debt markets, it should be able to borrow at 5-8%, resulting in $50-80 million in annual interest payments for every $1 billion borrowed.
The spill has cost roughly $1 billion so far, so assuming a worst-case scenario that the leaking wellhead isn’t contained for another 6 months, that might add about $7 billion to BP’s cleanup tab. This doesn’t include potential costs for cleanup after well flow has been stopped. Luckily, those costs can be contested in court (similar to Valdez incident or the ARCO/UNOCAL/Santa Barbara spill. Tony Hayward should get a gold star for coming out right away and saying “BP will respond to all legitimate claims for damage from this incident,” implying that BP retains the right to contest any serious penalties levied against it.
If BP manages to capture any of the oil that is currently leaking using a similar method abandoned when the effort to choke the wellhead using the mud/cement mix was started (5-10,000 barrels is a rough estimate of capture capabilities), you’re looking at a bit more than half a million dollars per day in REVENUE for BP that can be put towards the cleanup cost.
Let’s not forget BP pumps almost 4 MILLION barrels of oil per day (roughly $300 million in daily revenue at current prices). A cleanup tab in the billions of dollars might seem like a big deal to non-industry people, but again, most people aren’t familiar with the multi-billion dollar research, exploration, and development budgets that are commonplace among the supermajors ($20-30 billion annually).
BP’s worldwide production isn’t going to stop because of the Gulf oil spill. The company might have some significant PR issues (just another in a long line of flubs for the company), but it still will print money as long as people use oil. This doesn’t mean the price of BP stock won’t fluctuate or that the dividend might be not at risk, but it seems like an opportune time to buy a company (DSPP seems ideal to hold the stock for an extended period of time and allow for incremental purchases at very low cost) that is caught in a media firestorm exaggerated by people who don’t really understand the dynamics of the oil industry.
whoops, that should have been “flu”, not “flue”.
There is an arbitrage in real estate that I almost never see mentioned. One can buy an existing structure for less money than it would cost to build a similar structure that meets current building code. Having built a house a few years ago, I know this to be true. For this situation to continue, one has to believe that one of the following conditions possible:
1) The price of labor and materials will fall significantly.
2) Population will fall (flue pandemic like 1918?) thus requiring no new structures, making replacement cost moot.
I don’t believe either of the above is likely. Thus it seems the only other alternative is that housing prices will rise to at least replacement cost — well before the rest of the irrational mortgage problems have been pooped out the bottom of the snake. Arbitrage always gets exploited and leveled and it happens before it makes economic sense; by then it’s gone.
USDA
That’s exactly my point. Who would buy BP?
Rueter speculates only two possible suitors, Shell and XOM. Shell just bought a $4B gas company which has put quite burden on its balance sheet. XOM now is quite PR concious now and I am not sure XOM want to buy a company that everyone hates.
Following up on my comment from yesterday. The US market goes up, next day every other market will tend to go up.
That’s what happened.
It’s not the other way around, unless there is some disastrous news from elsewhere.
yx,
I think the exact opposite. If the probability of another integrated oil company acquiring BP rises, buying the shares will be a better idea. The aquisition would occur at a higher price than the market is trading the shares. This would be good news.
I just don’t think another company will attempt to take over BP until the scope of this disaster becomes more understood. If you really want to play this trade, I’d say to keep a close eye on the news over the next weeks and months. Note also that if the shares go up, the probability of an acquisition will go down.
As for me, it’s just not a trade that I care to play directly through BP stock.
For those who are tempting to jump on BP, go ahead and good luck! But not me. I was considering other major oil, but with BP take over rumor, I decided wait. I just think the BP liability will be too big and it is still unclear.
USDA:
Interesting point. I always think US has over-built and housing price is artificially high. However, investing in REIT is little different. BTW, I bought my REIT in 09 low and sold Jan. 10. I am too looking to buy back some now.
andante
I saw the news report too regarding the president’s hint on the job number this morning. It just added to my long suspicion about the Labor’ Dept. number. I rather look at ADP’s which is private sector.
dividend too good to be true pay a dividend strong corporate earnings
For anyone tempted to go into BP, ask yourself one question: What if the oil spill drags on for the rest of the year?
Not only will the damage done increase significantly, so will BP’s liability. And the story will continue to weigh on BP’s stock, possibly to the point of dropping it into the single digits. Yes, it could drop that far.
Still wanna buy it?
Howzattt
Senator Schumer says BP shouldn’t pay a dividend. (NB. This is the same guy who told China how they should value their currency.)
What is now being said is that the Vice-President and President leaked that the unemployment numbers will be good this Friday and this contributed to the market rally. However, sentiment is such that any small improvement in unemployment will be attributed to census workers and oil clean up hiring.
yx,
I’m not a real estate bull, and I never have been. I’ve always believed that owning a great company provides a better return than being a landlord. Like you, I also anticipate more foreclosures and people “walking away” from mortgages as the “new buyers tax credit” expires, until employment numbers look better.
That said, from a fair value perspective, I think there are starting to be some deals out there in real estate. So I don’t think prices will go down much further from here, because somebody (who wants to be a landlord) will snatch up the property and rent it out.
I also don’t anticipate real estate price declines having much impact on the larger economy moving forward; in fact, lower prices will be more of a stimulus to the economy than a drag.
Simply put, we are past the crisis. Bank balance sheets are better than they were, and well-run companies look better than ever. If real estate prices go down – let them.
I may become bullish and buy some REITs.
Howzattt,
Many stocks in the energy sector are now undervalued. Today’s rally reflected that. If I were adding a single major integrated oil and gas company to the portfolio, I would choose XOM over BP. There could be a very nice contrarian play on BP when the Deepwater Horizon news looks darkest, but I’m not sure we’re there yet.
In full disclosure, I own both BP and XOM through mutual funds (and recently made an additional contribution to my energy / natural resource fund).
Most forecasters are looking to growth and strong corporate earnings to produce upside in the markets. But corporate credit is still a stressed market. Bloomberg reported today that on 6/1 there were no new issues of corporate bonds, apparently because of concerns over European bond losses, widening of spreads, increasing LIBOR, etc. all leading to increased cost of floating bonds. Over the past month, the least amount of corporate bonds in 7 years were sold. This is important because businesses use corporate paper to run their businesses. Drying up of the market is a negative for continued growth. This makes it difficult for equities to turn and move up on their own.
On the other hand, the most recent AAIA survey reported a majority of investors more bearish than bullish. This is a contrarian indicator that suggests bullishness. But we need a catalyst of good news to turn the equities market and then confirmation in other risk markets. Today’s lack of reaction to the not so good news, may be safe haven seeking as Jim is suggesting but may also be a bullish sign.
Given the current stock price (and dividends), does it make sense to invest in BP
EWZ/BRF have outperformed SPY last 5 days in a row…
NLY is at the mercy of the FED. As long as low interest rates stay the dividend should be safe
Jim
What are your thoughts on NLY. Is the dividend too good to be true?
“Head-scratching”, “eyebrow twisting”, and mixed with “duh-what?” is how I would describe the market(s). One day traders & investors could care less about good reports (or even not as bad news) in the US. Let the Euro dance around like a jitterbug or a political figure say or do anything to cause a knee-jerk reaction in the markets and you have them kareeming out of control. While some may claim special insight, others haven’t a clue.
Until things calm down globally (enough that markets aren’t “spooked”) all will respond, “Duh what??…
The question is that how long the government can keep popping up the real estate market. In absence of significant improvement in the labor market, housing slump will continue.
Jim,
Based on what I have seen, this isn’t surprising to me. If US market goes up all the markets the following day tend to go up. Vice versa if US markets go down. It seems like more often than not, they take the cue from the US.
All markets close before the US. Since yesterday US market was down so much yesterday pretty much every other market closed down today. Look for all of them to go up tomorrow (or later tonight if you are in the US)
Thanks, Jim. Point well taken.