Markets Shrug Off U.S. Debt Negotiations

Markets Shrug Off U.S. Debt Negotiations
The Chase by BNN.ca Staff:

The markets are stubbornly failing to reflect the lack of progress in U.S. Congressional debt-limit negotiations. Although the major stock indices pulled back more than a half-percent yesterday, the futures market indicates Wall Street will bounce back today. Asian markets gained ground, and Europe – after starting the Tuesday trading session mixed but mostly higher – turned more negative on news that the British economy is, indeed, growing - but at a slower pace.

The loonie broke above the $1.06 level overnight and has traded this morning as high at $1.0612 U.S. – surpassing the three-and-a-half year high touched last Thursday. The Canadian dollar has typically been viewed as being "riskier" than the Japanese yen or the U.S. dollar, but with the United States approaching the deadline to raise its federal debt-limit or risk defaulting on some of its financial obligations, currency traders are increasingly looking at the loonie as a safer place to be invested. The U.S. Dollar Index, which tracks the American currency against six of its main trading partners, has fallen to the lowest level since June 7.

In earnings news, it was a good news bad news situation for Ford. The good news: the automaker's quarterly profit beat Wall Street expectations helped by higher prices and improved sales in North America of smaller cars. The bad news: improving profits make labour negotiations with the United Auto Workers more difficult. We'll be watching the conference call.

Rogers Communications beat expectations. The house of Ted made more money from smartphones – but reported flat profit as its fought hard to keep its lead position in Canada's wireless sector from being assailed by competitors.

Second-quarter profit at Cenovus more than tripled, helped by higher refining margins and strong crude prices. Rising crude prices also helped BP Plc – which has recovered from the $17 billion quarterly loss it posted a year ago, while fighting the Gulf of Mexico oil spill. In the latest quarter, BP earned $5.6 billion. That works out to a profit of about $61 million per day.

Every morning Managing Editor Marty Cej writes a "chase note" to BNN's editorial staff listing the stories and events that will be in the spotlight that day. In his absence, today's note was written by BNN's web editors.

Equedia Market Summary

Ivan Lo Equedia Weekly

We had yet another down week in the markets with the S&P, Dow, and the NASDAQ all taking a slight tumble. Which leads me to ask the question, why are people still investing in those markets?

Even with low P/E ratios, stocks remain volatile and the economic outlook doesn't exactly favour stronger earnings. Retail has been soft, manufacturing has been flat, the business investment production index fell substantially, consumer sentiment is down, and the CPI rising. Stagflation anyone?

Unless you're investing for the long term of 5-10 years, a lot of investments today just don't make sense.

Even as analysts predict improvement in the second half, none of them have given us any reason as to why. Even Bernanke, despite saying things will improve, continues to lower his forecast. Because of this, precious metals continues to rise as more fear and uncertainty brews.

The next wave of the precious metals boom is about to come and its going to be big. The strength supporting this rally is about to be injected with yet another round of steroids. Starting first with US politics.

This week, the credit-rating agencies that helped to create the recent financial crisis are now warning that the U.S. could lose the AAA rating it has had since 1917. Both Moody's and S&P threatened to downgrade US debt unless the US raises their debt ceiling once again - allowing the US to spend more and go further into debt.

There's no stopping this spending. In the last three years, the Obama administration has spent more than all of the past 20 administrations combined.

According to WSJ:

"With the recession as a rationale, Democrats consciously blew up the national balance sheet, lifting federal outlays to 25% in 2009, the highest level since 1945. (Even in 1946, with millions still in the military, spending was only 24.8% of GDP. In 1947 it fell to 14.8%.) Though the recession ended in June 2009, spending in 2010 stayed high at nearly 24%, and this year it is heading back toward 25%.

This is the main reason that federal debt held by the public as a share of GDP has climbed from 40.3% in 2008, to 53.5% in 2009, 62.2% in 2010 and an estimated 72% this year, and is expected to keep rising in the future. These are heights not seen since the Korean War, and many analysts think U.S. debt will soon hit 90% or 100% of GDP."

The substantial increases of federal debt held by the public as a share of GDP is just insane.

I am not blaming Obama. This debt ceiling debate happens in every administration. It happened 7 times in the Bush administration and the Republicans who were opposed to it, voted in favour of it during Bush's reign. The simple fact is, spending will happen.

So while the debt-ceiling and debt debates between the democrats and the republicans will more than likely by resolved before the August 2nd deadline, as it always has in the eleventh hour, the downgrade threats may keep coming.

That means the US dollar will lose more value. That means gold will gain.

But that's not where the spending stops.

Quantitative Easing

Fed chief Ben Bernanke was on Capitol Hill this week for his semi-annual testimony on the economy before congress to face the heat about the economy, the deficit ceiling and possibly more quantitative easing.

All he did was reiterate what we already know: The US economy is not where it needs to be and that he has no idea how to fix it.

More importantly, despite saying there won't be a QE3 in past conferences, he came out and said that if the economy needs help, the Fed will step in.

Wait a sec...isn't that exactly what we all expected anyway? ( see Age of America Over?) Isn't this what he said before QE2?

It's like I said before, QE3 will happen in some form or another. That means more government spending and more reasons why gold will continue to trek higher.

The financial woes in Europe are also contributing to higher gold prices.

After the European markets closed Friday, the European Banking Authority said eight banks failed its stress tests, with a combined capital shortfall of 2.5 billion Euros. A further 16 banks narrowly passed the tests.

The PIIGS nations are on tilt, facing serious debt issues. Ireland, Spain and Italy are all on the verge of being dragged down by the deepening debt crisis. We haven't even come close to a real solution for any of their major problems. All that has been done thus far are merely temporary bandages that will eventually be peeled off to show a wound that hasn't healed.

I don't like talking doom and gloom, but reality is reality. That's why I am loading up on precious metals stocks while I still can. This boom will be big, but we can't be sure how long it will last. The goal is to make as much money as possible during this precious metals rally - which could be 2 or 3 years - to stave off the next 5 years. After the next few years, I expect a very slow and underperforming market with very little opportunity.

Back to Gold

Gold has everything going for it right now. It has momentum on its side and has clearly become an asset class that's being favoured as both a "risk-on" and "risk-off" investment. It surged over $50 for the week, and has gained $108 an ounce in the last nine sessions.

With interest rates where they are globally, you're not going to get any real returns. That's why smart investors, including banks, have flocked to gold. There's a reason why it's up over 500% over the last decade, while the markets have lagged far behind.

Gold is nearing the $1600 threshold - a number which anti-gold investors said will never happen. While profit taking could slow its momentum, the trend remains to the upside.

Don't worry. If you think you missed the boat on the gold and silver run, there's another ship waiting.

Large managed funds, including hedge funds, added to their bullish bets on gold and silver two days before gold hit this week's record.

Traders increased their net long position in Comex gold futures and options by 25% from last week. These managed funds added 45,576 long positions and 1,184 short positions in the period ended Tuesday, just two days before August-delivery gold hit an intraday record $1,594.90 an ounce.

Managed funds also added to bullish bets in silver. Traders in silver added 1,214 long lots and shed 661 short lots. This took their net position up 10% from a week earlier.

I've specifically said over the last few weeks that the time for picking up bargains is coming to a close (see Before It's Too Late ). Since last week, not only has gold and silver soared but the AMEX Gold Miners Index, the GDM, shot high into the 1600s, closing above 1,654. We also saw the GDX , the Market Vectors Gold Miners ETF shoot to the upside, nearly hitting $60.

Finally, the GDXJ, the Market Vectors Junior Gold Miners ETF, has climbed above its 50 and 200-day moving average. That's a very bullish signal.

The time is coming for the next big rally in stocks, but it won't be in your traditional large caps. The smart investors and the big money are about to unload their holdings in favour of stocks geared toward precious metals. This includes everything from speculative small caps which offer the best risk-reward leverage, to mid-tier and large cap producers.

My current holdings include all of them. They include small and microcap gold and silver explorers, to large cap producers.

Last week, I mentioned that HSBC has unloaded most of its physical gold holdings in favour of gold stocks (see Before It's Too Late). They're not the only ones.

Catherine Raw, who helps manage BlackRock's $4.7 billion Gold & General Fund, said the rise in the gold price has outpaced cost inflation in the industry, meaning that gold miners are likely to see their margins and their profits increase this year:

"I, as an investor, would say that in the end, given that believe the world isn't going to collapse, while there may be a good few months of volatility left, if you're prepared to be patient, then I would see now as a very good buying opportunity," she said.

As I mentioned last week, there are a lot of battered stocks trading near 52-week lows, but that doesn't mean they are all bargains. The key is to look for companies with great projects in mine-friendly jurisdictions, but more importantly, a management team that can get things done.

While there are many great management teams loaded with geologists capable of advancing projects, I said I will be looking specifically for those who are capable of raising money and supporting their own stock.

Too often I see great projects destroyed by teams comprised only of geologists with no market experience. I can't stress enough how important it is to have a management team with both strong market experience and geological know-how.

As a result, I am finalizing my report on a speculative junior gold explorer that has already begun to drill on a property with significant potential. They're in a prime location surrounded by millions of gold ounces, with a strong management team to back it up.

Those involved in this company have raised billions of dollars in the past and have discovered tens of millions of ounces of gold. These guys know what they're doing. More importantly, they know the markets.

The final report should be released sometime this coming week. Be sure to keep your eyes out for our next Special Report Edition.

When the time comes where we start buying our groceries and tv sets with cows and pigs, that's when gold won't matter.

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Bernanke is on TV And Financial Markets Are Watching!

Wednesday’s tragic financial comedy came the way of Ben Bernanke and his testimony to the US Congress. In this testimony he said three important things; gold is NOT money (what it is, he did not say), QE3 is on the way, and that the Federal Reserve’s QE program has been a “PROFIT CENTER for the Treasury.” The two statements and the QE3 proclamation are all ridiculous; however, the “profit center” comment is the most absurd.

Have you thought through just what kind of relationship there is between the Treasury and the Fed? First, when the Treasury auctions bonds that are purchased by hedge funds, pension funds, or individual citizens, the purchaser uses his own funds to buy them and the Treasury pays him a rate of return for the use of his money. This is the way it is supposed to work; however, things get dicey when the Fed is involved.

When the Fed buys Treasuries it isn’t using cash on hand today from last quarter’s profit. It is conjuring up money out of thin air in order to pay for the bonds. When Bernanke was recently asked about this (not today) he said it wasn’t money printing. When asked where the money came from he smiled and said “from the Fed,” but it wasn’t money printing. When pressed again and asked if the money was on the books the prior day to pay for the multi-billion bond purchase he said no; it was indeed counterfeited for the purchase.

OK, we know that the Fed counterfeits money for these purchases (oh, and by the way, I DO understand that when a government prints money it is not actually counterfeiting but I don’t care – I will continue to use that analogy) but why was today’s statement laughably absurd? It was ridiculous because the Fed does not pay for bond purchases (QE) with its own money, it prints this money at a cost to the American people (read: INFLATION). Moreover, the Treasury pays the Fed the interest rate on the bond then the Fed remits that same interest payment back to the Treasury. And that’s a “profit center?” Are you kidding me? That’s a circle jerk!

How in the hell can that be a “profit center?”

If you’re married and your wife sells you a bond so she can go shopping, and you pay her with the kids Monopoly money, then she gives you some bucks from the money she “saved on sale items” for the cost of borrowing the Monopoly money, and then you “remit” those dollars back to her…was that a f%$!#* “profit center” for her? NO! It is a financial f%^$!#@ circle jerk that most people do not want to even understand.

“Bernanke is on TV? Who is that guy? I like his beard though, whoever he is. Is TMZ on yet?” Sadly, the average slack-jawed voting yokel is like this.

Here come the bears again. If you have NOT watched this whole video, please do so now. If you HAVE watched it, please view it again since it is relevant another time with today’s testimony of The Ben Bernanke.

http://youtu.be/PTUY16CkS-k

BNK-T, BNK-L) Target $12.00 Production Below Expectations, But Market Reaction Overdone

From TD, found on the net.
Bankers Petroleum Ltd.
(BNK-T, BNK-L) C$6.24
Production Below Expectations, But Market Reaction Overdone
EVENT:
On Tuesday, July 5, after the close, Bankers Petroleum Ltd. (BNK-T) released an operations update. This was followed by a conference call this morning.
Impact
Mixed. Overall slightly negative to our prior assumptions.
Details
Operations update: Q2/11 sales averaged 12,152 bbl/d (versus our 13,961bbl/d expectation) with an average realized price of $77.02/bbl, representing 66% of Brent (up from 65% in Q1/11). The miss was partially due to an export shipment of approximately 54 mbbl (600 bbl/d averaged over Q2/11) that was originally scheduled for June 29 being delayed into early Q3/11.
Q2/11 production of 12,973 bbl/d was 1.0 mbbl/d below our expectations, and 1.2 mbbl/d below management's forecast. Current production is 13,150 bbl/d, down from a Q1/11 exit rate of 13,550 bbl/d.

1,750 bbl/d is currently shut-in (60% higher than normal) due to multiple wells waiting on service rigs for workovers. In addition, a few wells are shutin for proximity to new drilling and some wells with high water production are shut-in to free-up water disposal capacity for higher productivity oil wells.

Bankers is currently sourcing additional service rigs and new water disposal wells are being equipped. We expect management will be able to reduce shutin volumes to below 1,000 bbl/d by year-end.

Guidance Reduced: New 2011 exit production guidance of 16-20 mbbl/d is effectively 10% lower than previous guidance for 20 mbbl/d. The adjustment has been made due to slightly lower-than-expected average production from horizontal wells as well as casing issues in existing wells that have been worse than expected.

Also, we note that Bankers is carrying out less reactivations than originally budgeted to keep service rigs available for completion and maintenance of new (higher productivity) wells.
Horizontal Drilling Update: During Q2/11, Bankers drilled a total of 19 wells consisting of 18 horizontal wells and one vertical water disposal.

Management has highlighted the first two Gorani horizontals producing 170 bbl/d and 180 bbl/d as validating primary productivity from the Gorani Formation in the northern area of the field. Management intends to further develop this formation with a large number of horizontal wells to access more than 220 mmbbl of oilin-place (OIP) assigned to the Gorani in this part of the field. Only 5% of that OIP had been previously booked as 2P reserves based on the assumption of development by reactivation of existing vertical wells.

However, decline analysis suggests ultimate recovery from horizontal wells may be slightly lower than previously expected (management is suggesting 245 mbbl/well compared to an average of 260 mbbl/well assumed for 2P reserves). High initial productivity wells are exhibiting 30-50% declines in the first six to twelve months followed by a leveling off in rate and reduced declines of 10-20% beyond initial decline period.

A fourth drilling rig arrived in Albania in May and spud its first well in June (slightly delayed from a previous expectation for start-up in May). A fifth drilling rig has been contracted and is expected to be ready for drilling operations in October 2011.

Minor delays to projects: Although progress is being made, first steam injection on the planned thermal pilot is now scheduled for September 2011 (previously July) and drilling of the first gas exploration well on block F is now expected in the Q4/11 (previously Q3/11). Completion of the pipeline from Patos-Marinza to Fier is progressing with completion expected in September (unchanged).
Outlook
We have reduced our near-term production estimates due to both currently shut-in production and horizontal
well performance trending slightly below our expectations. We see potential for infill drilling currently being tested to offset the impact of lower recoveries per well. And we see increased potential for reserve additions from new zones (due to the successful Gorani wells). However, adding more locations to both our Base and Fully-risked NAVPS cases has only partially offset the negative adjustments (deferring some production for shut-ins, and assuming slightly more capital required to develop reserves and maintain production). Valuation
At 0.83x Base NAVPS, Bankers is trading at close to the lowest multiple in our coverage of International E&Ps on that metric (67% discount) and is at a 10% discount on Fully-risked NAVPS. On 2012E EV/DACF, Bankers is trading at a 24% discount to the group.
Justification of Target Price
We are decreasing our target price for Bankers, which is based on a combination of Base and Fully-risked
NAVPS, to C$12.00 (from C$12.50) due to decreases in our NAVPS estimates. The combination of 1.0x Base NAVPS and 0.85x Upside to Base NAVPS is close to the highest multiples in our coverage of International E&Ps, due to what we see as relatively strong management and finances. We currently use a range of 0.6–1.05x in terms of our multiples of Upside to Base NAVPS.
Exhibit 2. Bankers Petrleum: Target Price Calculation
Base NAVPS C$7.48
Multiple 1.00x
Target contribution C$7.48
Fully-risked NAVPS C$12.83
Upside to Base NAVPS C$5.35
Multiple 0.85x
Target contribution C$4.55
Calculated target price C$12.03
Actual target price (rounded) C$12.00
Source: TD Newcrest.
Key Risks to Target Price
Key risks associated with our target price include business risks of the company and industry, including but not limited to: loss of key employees, drilling success, volatile commodity prices, operating costs, capital cost
overruns, product supply and demand, financing/access to capital, government regulations, legislation, royalties, taxes, exchange rates, interest rates, environmental and weather concerns.
The key near-term risks specific to Bankers are:
• Downside risk in a lower heavy oil price environment (we believe that under US$50/bbl, a significant proportion of undeveloped reserves would become uneconomic).
• Availability of processing and export infrastructure, including delays in developing infrastructure, is a considerable risk, and could delay production growth.
• Higher than average geo-political risk.
Investment Conclusion
Overall, we view Bankers' Q2/11 operations update as slightly negative, due to production trending below
expectations, including average horizontal well production. Management has lowered 2011 exit guidance and
indicated minor slippage in the timing of multiple projects. However, the update did provide multiple positives
that include indications that horizontal drilling is continuing to yield results that could boost reserves (as well
as continued improvement in realized pricing).
Adjusting our model for the news has reduced our Fully-risked NAVPS estimate by 4%, which is the main
reason we are lowering our target price to C$12.00 (from C$12.50). We view the initial share price reaction
today (down more than 10%) as likely overdone, and maintain our Action List BUY rating. Key potential
catalysts include expected production growth, gas exploration and a thermal pilot in late 2011, as well as the
next reserves update in March 2012. If market valuation does not improve, we expect potential for a take-out to increase in the near term.


Read more: http://www.benzinga.com/11/07/1748948/bankers-petroleum#ixzz1Rub88RWT