2/18/2020

Good morning,

I hope everyone had a good weekend. I went on a little two week hiatus there. My bad on that. Some snow covered slopes were calling my name so I had to answer and go ski down them for a bit. I made the right decision in doing so. While I was gone, the NBA trade deadline came and went and OKC decided to stand pat with its roster for the rest of the season. Allegedly there was a trade in place with Miami to send Gallo there, but it was contingent on Gallo signing an extension with the Heat and they were never able to come to an agreement so the trade was never executed. That always seemed like a smoke screen for Presti anyways. He has a strong history of never letting his trades be leaked to the media unless he is doing it to provide him with more leverage on another team. The best example I can think of is back when the Brooklyn Nets thought they had a trade in place to send Brooke Lopez to OKC. This trade had been leaked to the media and it was assumed to be mostly done. Then at the last minute, it was announced that OKC had actually consummated a trade with the Utah Jazz for Enes Kanter. Presti used the Nets formerly incompetent management against them, gained leverage against Utah through the press, and ended up obtaining a stronger return with the Jazz than OKC would have had with the Nets. #negotiating. I would have put someone else's entire life savings on Gallo being traded before the deadline this year. His contract is expiring this summer and he's not a long term piece in OKC. The Thunder have blown away expectations though and so it appears that Presti decided to just let it ride with this group and see how well they do in the playoffs. All the trades will take place this summer now and there will likely be a sign-and-trade completed with Gallo where he signs an extension with OKC (b/c OKC can pay him the most) and then agrees to be traded immediately after. Presti will most likely target 1st round draft picks and/or a young player in return. I'm all in for that. OKC's title window doesn't really open until about 2023ish so, get as many draft picks as possible and play the odds of landing a couple superstars. If OKC has 15 first rounders before 2023, then it would be a fantastic haul if they were able to draft one dude, one superstar, and two or three role players. Batting 2/15 for superstars and 5/15 for superstars+role players would be incredibly difficult. There is a reason why 1st round picks are so highly coveted. Well unless you are the Pistons and you trade your best player in Andre Drummond for a bag of chips and some scratchers. That is pretty much what they did. One of the best things about the trade deadline is witnessing bad franchises continue to be bad franchises. It never gets old. News never stops being new though. The Democratic primary season started off with a flop, E&P companies find some company at the bottom for a day, OPEC is going to have to save oil prices again, E&P co's are getting beat up in the bankruptcy market, and farmers are not immune to bankruptcies either.

February 10, 2020

Forget Russia, the biggest threat to American democracy is a failed app in Iowa

• Of course Russia can't actually be forgotten, but a failed app left the state of Iowa and the Democratic Party in a state of embarrassment last Monday. Iowa leads off the presidential nomination cycle for each party every four years and it likes to do things caucus style. For people like me, I had to look up what the actual difference is between a "caucus" and a "primary." According to dictionary.com, a caucus is "a meeting of party leaders or party members to select candidates, elect convention delegates, and establish the party’s policy position on specific issues.” Whereas a primary is defined as "a preliminary election in which voters of each party nominate candidates for office.” Both avenues are a way for a state to nominate a primary candidate to become its presidential candidate. As the old saying goes, there are multiple ways to skin a cat. That is a really gross saying. I have no desire to look up how that came to be a saying. Results of the caucus were supposed to be out on Monday evening, but were delayed due to a bug in the app's computer code. This was the first year Iowa tried to use this specific app and it failed tremendously. The app would only report partial results whenever Democratic Party officials tried to submit voting tallies. Regardless of how the results shake out, there is already doubt being cast on the integrity of the system and whether or not the results out of Iowa will actually mean anything. This error led to U.S. Senator Amy Klobuchar, former VP Joe Biden, U.S. Senator Elizabeth Warren, U.S. Senator Bernie Sanders, and South Bend, Indiana Mayor Pete Buttigieg to all declare a victory of some kind via a cable TV audience on Monday night. No official results were in, but somehow victory was being claimed. The Democratic Party seems very motivated to beat sitting U.S. Republican President Donald Trump out of office in November. However, starting the nomination process off like this is a complete and utter disaster for them. Mr. Trump surely take advantage of this and say some ridiculous things on Twitter and TV and what not. It's almost like the Democratic Party decided to spot Mr. Trump a 2-0 lead in a 7 game series just for kicks and giggles. Mr. Biden's camp sent an angry letter to Democratic leaders in Iowa that said the state has "acute failures are occurring statewide." And then goes on to say "we believe that the campaigns deserve full explanations and relevant information regarding the methods of quality control you are employing, and an opportunity to respond, before any official results are released.” The fallout will leave the integrity and transparency of the caucus process in question and lend little credibility to the actual "results." If any Democratic candidate can be called a winner here, then it is former New York City Mayor Mike Bloomberg. He skipped campaigning in the first four states (Iowa, New Hampshire, Nevada, and South Carolina) because of how late he jumped into the race. Mr. Bloomberg is spending nine figures in television adds in Super Tuesday (March 3rd) states. If no clear front runner emerges after the first four voting states, then Mr. Bloomberg's chances will likely improve significantly. In the end, the two winners of the Iowa debacle seem to be Mr. Trump and Mr. Bloomberg. Two billionaires who do not really need early state wins in order to keep funding their campaigns. That fact cannot be overlooked.

Misery loves company, oil finds friends in bear territory

• Welcome to the bear zone all of you none oil and gas stocks. Energy companies have been here for a while and now markets both domestic and abroad are starting to join energy co's at the bottom thanks to the coronavirus. The Dow, S&P 500, and Nasdaq indices sold off on Friday, January 31st due to the fear of U.S. economic growth being dented due to the coronavirus. Unlike energy stocks though, all three major indices bounced back on Monday, February 3rd, as the Dow increased 0.6%, S&P gained 0.8%, and Nasdaq rose 1.3% on the day. In the meantime, WTI prices fell off by another 2.8% on Monday and briefly dipped below $50/bbl. WTI prices are down 20% from its peak in January. 20% drop in one month. Amazing. It makes planning out how the year will go at an E&P as easy as figuring out which burner account durant is using to defend himself. Energy companies had visitors at the bottom, but only for a day. At least they know there is someone else out there still. Michael Mullaney, director of global markets research at Boston Partners, believes that investors may have viewed Friday's market selloff as just another buying opportunity. He compared it to the SARS outbreak a few years ago and how stocks dropped initially when the virus first broke out, then rebounded once the infection rate started to slow. Mr. Mullaney said, "once you see a slowdown in the uptick of new cases, historically the market has generally done quite well after that.” Hopefully that theory will apply to energy stocks as well but it looks like there will be a decoupling there. Oil demand continues to be under pressure from China as major airlines have suspended flights into mainland China and transportation within China has been reduced as well. OPEC, led by Saudi Arabia, is already contemplating cutting production in the near term to try to offset the loss in demand. More on that in a second. While markets are currently volatile in the U.S., China's Shanghai Composite Index is making the U.S. market reaction seem tame. The Shanghai Index closed 7.7% lower last Monday as it was the first day of trading following the extended Lunar New Year break. This selloff represented the index's steepest one day drop since August 2015 with many of the stocks within that index dropping by the maximum 10% that is allowed, according to the Wall Street Journal (WSJ). In the backdrop of all of this, Goldman Sachs downgraded energy giant Exxon Mobil to "sell" from "neutral" based on disappointing 4Q-19 earnings and a challenging macro environment that puts significant pressure on the oil major to deliver on its 2025 targeted returns. If Exxon is getting downgraded, then look out below to all the other E&P companies. Seems likely that most indices will see a bump once the coronavirus shows signs of containment, except for energy stocks. Par for the course lately. Carry on.

Oh hey what's up Saudi Arabia, there is too much oil supply globally soo... do something

• One would think that Saudi Arabia, and OPEC in general, would grow weary of carrying the swing volume burden for global crude supply at some point. The advantage U.S. producers have over OPEC is that U.S. producers just need to make money to fund operations and provide some cash back to shareholders whereas Saudi Arabia's and other OPEC countries have significant social programs tied to the profits of oil and gas production. This forces OPEC members to be the swing producers. The worst thing that happens for a U.S. producer if it fails is to file Chapter 11 bankruptcy, re-organize debt, and give it another shot. The worst thing that can happen to an OPEC member if it fails is that the country fails. This is likely the primary driver behind Saudi Arabia pushing for a "major short-term oil production cut as it seeks to respond to the impact of China’s deadly coronavirus on crude demand," according to OPEC officials. An emergency meeting is set to take place on February 4th and 5th to discuss further cutting production as soon as possible. The actual decision to reduce production would be made next week. This meeting was set to take place in March but is being moved up by a month. Initially, Saudi is targeting another 500k bpd cut which would increase OPEC's total production cut to 2.2mmbpd. A separate, more desperate option calls for production to be temporarily cut by another 1mmbpd which would increase the total cut to 2.7mmbpd. Brent crude, the global oil price benchmark, rose on the news last Monday, the 3rd, but not materially and hovered around $56/bbl on the day. Saudi Arabia requires at least a $60/bbl oil price in order to balance its budget, according to the WSJ. The exact decline in demand in China is difficult to nail down. Estimates of demand loss have a range of 1mmbpd to 3mmbpd in February and March. S&P Global Platts analysts even have a 'worst case scenario' that shows oil demand experiencing its first year-over-year decline since the Great Recession. In this scenario, Chinese demand falls off by 50% in 2020. China is the largest buyer of Saudi oil exports. While U.S. producers are facing the wrath of the coronavirus, it pales in comparison to how significant of an impact it is to Saudi Arabia and other OPEC members.

Bankruptcies lower asset values, oil and gas companies just can't win

• Oil and gas companies have been valued in the marketplace by the amount of reserves they own and the overall value of those reserves forever. Nowadays the valuation of oil and gas companies is a bit different as investors are pushing energy co's to focus on spinning off free cash flow and returning it to them in the form of dividends or stock buybacks. However, the underlying value of each oil and gas company's asset base remains paramount to deriving the true value of that company. This is true when trying to peg down what the price of an oil and gas stock should be and is especially true if an oil and gas company has to go through bankruptcy. Asset values have a wide range of how they can be derived, but in the case of bankruptcy, the "fair market value is determined by the gavel going down," according to Charles Beckham Jr. (not a son of David Beckham) who is a partner at Haynes and Boone LLP's Restructuring Practice Group. This has massive implications for lien holders. Typically, there are a few parties that have some type of right to a bankrupt oil and gas company's assets and others who have interest in picking off the asset for pennies on the dollar. How assets are valued in these cases can vary wildly as there is no single way to do it. Bankruptcy judges usually reference reserve reports in order to derive what the value of the asset is in question. However, there is plenty of debate about this method. Kelli Norfleet, also a partner at Haynes and Boone's, explains: "Not all reserve reports are created equal. What's the 'as-of' date? One from a year ago could be very different. What price deck are they using? That could make a huge difference in the value of the reserves. Reserve reports themselves are not an indicator of fair market value. They are evidence of value, but can vary widely." The discrepancy can ultimately determine who gets paid and who gets left out in the cold (well I mean, if a winter ever actually happened). Mr. Beckham said that "the first lien lenders, the [reserve-based] lenders, there's enough value for that debt to remain unimpaired in the bankruptcy, but you junior lienholders, you're out of the money. Why? Because the court has determined the value of the assets. In the bankruptcy court, we could see differences of opinion on value." No one likes to run out of money. You know who never runs out of money even though the product the company puts to work is bankrupt, entertainment wise, year after year? The New York Knicks. James Dolan just sits around playing his guitar and singing weird songs while he trots a key role player at point guard, Dennis Smith Jr., whose name doesn't even show up in the top 7 search results in Google and calls him the future. The Knicks traded the unicorn, Kristaps Porzningis, for this guy basically because Dennis Smith Jr. still had some upside possibility even though he had never really proved much with the Mavericks after he was drafted 9th overall in the 2017 draft. I mean, the dude is still getting beat out by Dennis the menace on Google. Dennis the menace! Even Thunder hooper Dennis Schroder's wife is beating him out. I didn't even know Schroder was married until just now. Kristaps was the best player the Knicks had employed in a long time and decided to trade him before his first contract was even up. It all doesn't even matter though. The Knicks are routinely number one or number two in the NBA franchise rankings in terms of value. Last year their valuation was $4B. Good for #1. Lakers were $3.7B. This was as of last year though but things won't change much. The Knicks are an awful company and they still print money.

Speaking of bankruptcy, American farmers aren't doing so hot either...

• Let's start a trade war, they said. It'll be good for American farmers, they said. Let's trade for Bradley Beal, they said. Hold on to that last idea actually, OKC + Brad Beal would be sick. Those first two things though have not turned out so well for American farmers. "U.S. farm bankruptcy rates jumped 20% in 2019 - to an eight-year high - as financial woes in the U.S. agricultural economy continued in spite of massive federal bail-out funding," according to federal court data that was pulled by Reuters. More stats brought to you by Reuters: "According to data released this week by the United States Courts, family farmers filed 595 Chapter 12 bankruptcies in 2019, up from 498 filings a year earlier. The data also shows that such filings - known as “family farmer” bankruptcies - have steadily increased every year for the past five years." Chapter 12 bankruptcy is pretty much like Chapter 11 bankruptcy where corporations can stay open for business while restructuring debt, but for farmers. The reasons provided for the increase in bankruptcies for farmers include "trade battles, ever-mounting farm debt, prolonged low commodity prices, volatile weather patterns and a fatal pig disease that has decimated China’s herd." Woah, didn't see the China pig thing being thrown in there. Maybe that is where the coronavirus actually started. Billions of federal aid over the past two year that was sent to local farmers has still not been enough to offset the headwinds listed above. According tot he U.S. Department of Agriculture, "nearly one-third of projected U.S. net farm income in 2019 came from government aid and taxpayer-subsidized commodity insurance payments." Yeesh. The federal aid did end up halting a larger economic fallout though, according to John Newton. And yes, that is the same John Newton who wrote Amazing Grace. Just kidding. I think I'm kidding anyways. Always a chance that John Newton is invincible I guess. Supposedly this John Newton is the chief economist for the American Farm Bureau Federation. John Newton, the economist, goes on to say that American farmers "still have supply and demand uncertainty. If we see prolonged low prices, I wouldn’t expect this trend to slow down.” No good. Farmers are some of the hardest working people on the planet. Hopefully farmers fortunes will reverse course soon and get them back to being successful as a whole.

Thoughts of the week:

• A solid way to slight someone is to call them the "MJ of their craft," but in your mind, you are referencing the baseball version of MJ, not the hoops one.

• The marathon race distance was inspired by an ancient Greek soldier that ran roughly 25 miles to tell Athens that the Greek army based in Marathon had defeated the Persians. Now people pay for that experience. I will never understand that.

• If NASCAR drivers get too many speeding tickets in the real world, are they still allowed to race?