'Fast Flowing, Slow Going'… Why Canada's 'oil mud' is going to get trapped north of the border…
In today's Digest Premium… we take a closer look at the factors causing oil from North Dakota's Bakken region to squeeze Canada's import out of the U.S. market…
To subscribe to Digest Premium and access this today's analysis, click here.
The new, popular mortgage... More bullish housing news... A controversial report from an outraged editor... This billionaire likes stocks...
The Wall Street Journal published an interesting piece about the rising popularity of 15-year mortgages – a loan that has long been viewed as a niche product (or an afterthought in the market).
Thirty-year mortgages are the standard in lending because the low monthly payments made homes more affordable. And while 30-year notes still rule by a wide margin, the 15-year mortgage is gaining traction thanks to record-low interest rates... "The 15-year loan has gone from really being almost a non-issue item to a new trend," Stu Feldstein, president at mortgage research firm SMR Research, told the Journal.
Almost 16% of the fixed-rate mortgages that were sold to Freddie Mac in the third quarter were 15-year loans, up from nearly 10% the year before. And 15-year mortgages accounted for almost one-third of refinanced loans in the first seven months of the year. In 2007, they were just 8.5% of refinancings.
Fixed rates on 15-year notes average 2.81% today, down from 3.36% a year ago (and 5.85% in December 2007). The average rate for a 30-year fixed mortgage is currently 3.44%. The 63 basis-point spread (bps) is historically wide. (A basis point is 1/100th of a percent.) Prior to the housing crisis, the spread was between 0.25 and 0.35 bps.
Record-low interest rates are one of the reasons we're bullish on housing today. Low prices (in many cases, below replacement cost) and continually improving housing data are the others. And the good news keeps coming...
In November, U.S. homebuilders finished the strongest three months for residential construction in four years. The average rate of housing starts from September through November was the highest since the three months ended August 2008.
Year-to-date, housing starts are up 27.1% from the same period last year. And the number of building permits issued increased 3.6% in November to an annual rate of 899,000 – the most since July 2008.
And homebuilder confidence climbed for the eighth straight month, hitting its highest level in more than six years, the National Association of Home Builders/Wells Fargo reported yesterday.
You may have seen the Bloomberg article yesterday talking about the California Highway Patrol officer making nearly $500,000 a year... Division chief Jeff Talbott retired last year as the highest-paid officer among the 12 most populous U.S. states, collecting $483,581 per year in salary, pension, and other compensation. Talbott received $280,259 for accrued leave and vacation time. He also took a new job running the public-safety department at a private university in California. Plus, he's collecting an annual pension of $174,888 from the state.
While shocking, this officer's egregious compensation is a small part of a much larger problem... Our government, both local and federal, is broke. Even if the government doubled its tax revenue, we would still have an annual deficit.
But that hasn't stopped our government from going further into debt... Just this month, the Federal Reserve announced it would add $1 trillion a year to its balance sheet. Yes... The Fed will buy $1 trillion a year in government debt and mortgages.
This all leads to a desperate and increasingly aggressive government that will do just about anything to get money... The government is already discussing having U.S. citizens put a portion of their retirement money into government-controlled accounts. They're also seizing safety deposit boxes and auctioning off the contents.
But it goes further than the financial control... The government is also listening in to our private phone calls and reading our private e-mails. Almost every move we make today is captured on camera. On that topic, the government has already allocated billions of dollars to develop spy drones to fly high in the sky, surveying everything below.
One of our colleagues is outraged with this gradual stripping of our freedoms... That's why he believes everyone has a "moral and ethical responsibility as an American citizen to hide some of your money from the aggressive beast our government has become... until this wave has passed."
This editor recently prepared a special report for subscribers detailing ways you can "get off the grid." This report tells you how to legally hide money from the IRS. (He says he's pocketed more than $50,000 in tax-free income this way.) This report shows you how to keep your e-mails totally secret. (This method was allegedly perfected by terrorists and cheating spouses.) And it makes sure a thief can't use your credit card, even if it's stolen.
It even explains how you can beat facial recognition... so that cameras can't track your every move.
While this information is 100% legal, it's still sensitive... That's why the editor asked us to conceal his name here. (Though he does make this presentation, we've hidden his identity.)
He's spent years gathering the information that went into this report. You can watch his presentation here...
Leon Cooperman, the billionaire founder of hedge fund Omega Advisors, appeared on CNBC this morning... And he's buying stocks...
"The [Fed] has created an environment where there is no effective alternative to stocks," Cooperman said.
Cooperman believes the Fed's near-zero interest rate policy will discourage investors from buying bonds. He called the 1.8% yield on 10-year Treasurys "ridiculous," adding that "adjusted for taxes and inflation, you're getting a negative return."
Meanwhile, he says, "Half the stocks in the market are now yielding more than fixed income. You have to go back to 1958 to see that kind of condition."
Despite his equity bias, Cooperman still thinks stock returns will be below historical averages... Stocks will still outperform bonds, which he believes will provide significant negative returns over the next three to four years.
Cooperman's fund, Omega, is up 30% year-to-date. (That's compared with the hedge-fund industry's average return of 5.7% over the same period.)
Earlier this month, Omega disclosed a 7.5% stake in McMoRan Exploration – the company Freeport-McMoRan recently purchased. The filing marked a position increase of nearly 70%. It was based on activity from December 6. (Freeport bid for McMoRan on December 5.)
Cooperman pitched McMoRan Exploration at the Great Investors' Best Ideas conference in Denver in October. At the time, McMoRan shares traded for $12, and Cooperman said it should be a $33 stock.
New 52-week highs (as of 12/18/12): iShares Germany Fund (EWG), iShares U.S. Home Construction Fund (ITB), PowerShares Buyback Achievers Fund (PKW), Sequoia Fund (SEQUX), Monsanto (MON), Travelers (TRV), Walgreens (WAG), Sysco (SYY), and Home Federal Bancorp (HOME).
We always love when a subscriber tries one of our recommended trading strategies and makes a fortune... Have you? Let us know here... feedback@stansberryresearch.com.
"When Porter recommended buying Bank of America last April, I sold the May 19, 2012 $10.00 naked puts. The stock was subsequently put to me with a net cost basis of $9.20. Today's close over $11.00 gave me over 20,000 reasons to smile!" – Paid-up subscriber John J. Meirose
"Never emailed you guys before but I just wanted you to know that, as a loyal member of your services for many years now, I truly appreciate reading your daily S&A Digest and seeing the crazy emails you guys get with people saying they are cancelling their subscription. I read it everyday and it gives me a good chuckle to start the rest of the day because I know that you guys have made me and my children money with your recommendations and yet these dingbats don't get it! Just wanted to tell you to keep up the good work.
"And, as a curious subscriber and being able to travel since I'm retired, someday I would love to just 'drop in' on your offices in Baltimore to see what it's like behind the scenes and maybe even meet some of you in person to thank you for your help." – Paid-up subscriber Vincent Zujewski Jr.
Porter comment: Well... you won't find us there. I live most of the time in Miami Beach. Sean lives in New York City. Brian Hunt lives near Ft. Lauderdale. Dan Ferris lives in Oregon. And Jeff Clark lives near San Francisco.
My three staff analysts (Brett, Brian, and Dave) live in Barcelona, Atlanta, and Seattle, respectively.
I'd say we all work on the Internet... And where we are physically is irrelevant.
Regards,
Sean Goldsmith
New York, New York
December 19, 2012
'Fast Flowing, Slow Going'… Why Canada's 'oil mud' is going to get trapped north of the border…
In today's Digest Premium… we take a closer look at the factors causing oil from North Dakota's Bakken region to squeeze Canada's import out of the U.S. market…
To continue reading, scroll down or click here.
Earlier this week, oil coming from Canadian oil sands – what we've termed "oil mud" because of its low quality and muddy consistency – dropped to less than $47 a barrel. That's compared with nearly $90 a barrel for West Texas Intermediate (WTI) crude... and $85.38 a barrel for oil coming from North Dakota's Bakken shale.
We previously wrote about how shale oil was destroying the Canadian oil-sands in the December 4 Digest Premium. Back then, the spread between Western Canada Select (WCS), refined from "oil mud," and WTI was almost $30. Today, the difference – the so-called "spread" – has widened to $34 per barrel. (The spread grew as wide as $40 earlier this week.)
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The international credit rating firm DBRS just released a study comparing the economics of producing oil in the Bakken with Canadian oil sands, titled "Fast Flowing, Slow Going."
The firm concludes the Bakken has a price advantage of at least $20 a barrel over the oil sands. And that for continued investment in the region, the Bakken needs WTI prices to be in the $60-$80 range. On the other hand, the Canadian oil sands need it to be in at least the $80-$100 range to make it worthwhile.
You see, oil out of the Bakken is "light" – just like WTI. That means it's a higher-quality product and easier to refine. And it costs less to transport to refineries than the product from our northern neighbors. It has better access to pipelines and rails, so it can get to refineries quicker. These two factors mean producers get a faster payback with Bakken oil.
And keep in mind, the heavy stuff out of the oil sands, called "bitumen" in the industry, has to be upgraded to just to match WCS quality... so it trades at a $20 discount to WCS.
DBRS claims the cash operating costs for both Bakken and Canadian oil sands are similar – at between $30-$40 per barrel. (This is total business costs, not extraction costs.) As a result, the analysts say $40 per barrel WTI prices would kill both the Bakken and Canadian oil sands.
We expect the pressure on oil prices to continue. We're simply producing too much oil right now. But we doubt WTI will hit $40 per barrel. However, we do expect the spread between shale oil and Canadian oil to continue widening.
And... there's one other factor that should be troubling oil sands producers...
Both regions suffer from the lack of pipeline infrastructure. We're producing so much oil being produced in North America right now, companies are literally shipping it across the country by rail (an inefficient and expensive alternative)... According to Bloomberg, in August this year, rail accounted for 46% of crude oil transported out of the Bakken. That's up from 28% in March this year and just 12% in March 2011.
The situation is worse for Canadian producers. These companies need to get the bulk of their oil to U.S. refineries. Right now, the more than 660,000 barrels of oil spurting out of the Bakken wells every day are grabbing most of the available capacity.
So while shale oil will consume most of the pipeline capacity... Canadian "oil mud" will be trapped up north... driving prices down further.
'Fast Flowing, Slow Going'… Why Canada's 'oil mud' is going to get trapped north of the border…