Professor Elam

Accounting & Investing Info for San Antonio A & M

recent posts

about

  • Professor Elam

    Oil Headed Back to $42

    Weekend July 25, 2015

    Puzzling Divergences in the Energy Sector

    I’d say there is a big difference psychologically between $50 and $49.

    Allen Gilmer, CEO DrillingInfo

    The market for surface oil technologies in North America is stabilizing though it is unclear where it goes from here.

    Charles Sledge, CRO, Cameron International

    The prognosis assumes no significant change in market circumstances through yearend.

    Bernard Duroc-Daner, CEO Weatherford International

    A few weeks back we declared $50 to be the ‘line in the sand’ for oil prices. Oil is now trading within $5 of its previous low of $43.46 on March 17. But strangely, not all energy sectors are still declining. Let’s take a look.

    Crude Oil futures trade for every month of the year on the New York Mercantile Exchange NYMEX. This morning September futures are $48.38 but December is trading at $50.13. So the near term is below $50 but four months out that level is still holding.    Unleaded gasoline has fallen below its entire daily moving averages, which is negative. But at  $1.81 on the close yesterday, it is well above the sub $1.130 level of January.  Heating oil at $1.637 is less than a dime from its January lows.

    Since the start of the year, crude oil has made two lows around $45. It appears headed for a third low in that area. Market technicians refer to this as a ‘triple bottom. ‘  Most triple bottoms do not hold resulting in lower prices.

    Commodity markets typically have to go to such low prices that some producers are literally driven out of the market. Which is to say prices have to fall below the cost of production. This means only the strong balance sheets with lots of cash and low debt survive.   Already Hercules Offshore, a Houston shallow water driller, will file for Chapter 11 next month.

    The Saudis have higher costs today than in the past. And surely they view low prices as hurting their nemesis, Iran.

    Market lows happen amid massive pessimism. The result is that such lows tend to be sharp and short-lived. The March 17 low is a good example. Amid negative sentiment, social mood turned on a dime and prices rallied to $61.

    There are other signs of an eventual low.  The basic accounting equation holds that Assets minus Liabilities equals Owner Equity or book value. When publicly traded firms fall to book value or below, assuming they have cash to sustain them selves through a loss period, such companies are a ‘Warren Buffet’ kind of buy. We have evidence that is happening now.

    Let’s start with the majors.  A price to book value ratio of 1 has a company trading at exactly book value. A value of say 1.03 means the firm trades for just 3% over book.   With that in mind British Petroleum BP is 1.03, Chevron CVX is 1.12, and Conoco-Phillips is 1.37.  And BP is paying a 6.2% dividend at this price.

    Interestingly the pipeline companies seem to be registering lows after falling the last several weeks.  Alerian MLP AMLP an ETF of some 25 Master Limited Partnerships has fallen from $19.35 to $14.97, now trading at $15.08. The fact that it is not falling with the price of oil suggests investors are seeing value. This is particularly so in light of the overall stock market drops this week.

    Energy service companies are trading for lower values than energy producers, which is usually the case in a bear market. Price to book ratios include Patterson PTEN .86, Transocean RIG .38 (not a misprint, 38% of book even after write downs!), and Key Energy Services KEG at a mere .21. Key is trading at $1.32 a share, which is less than the $2 it hit at the 2009 Crisis Low.   The big guys like Halliburton and Schlumberger are trading at twice book.

    Eagle Ford producer Abraxas AXAS is trading fell to $1.69 yesterday close to my target of $1.50 mentioned on my weblog.  At $1.88 today it is literally trading for book value.

    Natural gas prices are in much better shape than crude oil. Natural gas needs a weekly close over $3 to get going. Devon DVN is trading for 17% over book and train wreck Chesapeake at a mere 58% of book value.

    It is not too early for investors to start tracking their favorite energy or energy service companies.   Warren Buffet has become legend for scooping up bargains when as he says ‘others are fearful.’ Look for strong balance sheets (lots of cash and low debt) with a long management history. There is a low coming for oil prices but no one rings a bell at the bottom. 

  • Professor Elam

    Atlantic and Pacific Tea Company Files for Bankruptcy, Again

    Thursday July 23, 2015

    For the second time in five years,  A & P has filed for bankruptcy. This is not a familiar name to most younger students but when I was a kid, A & P was the equivalent of Wal Mart today but in the grocery business. 

    With assets of $1.6 B and debts of $2.3 B, looks like the party may be over. 

    The larger companies get the more they tend to stray from their roots and lose their way. 

    MCD laments there is no silver bullet for a three year turnaround. Yet as we recently noted In and Out burgers  is doing great business at their two SA locations.

    General Motors and Chrysler, now Sears, J C Penny almost, Radio Shack is about gone, Woolworth became Woolco and then disappeared,  communities have the No Thanks sign out for WMT. 

    It is interesting that In and Out and Whataburger have worked to keep their original vision in tact, and not blanket the world with more stores than they can manage, or change if need be. 

  • Professor Elam

    On Preparation

    Thursday July 23, 2015

    It happened again as it does so many times. The class showed up but near no one had read the chapter. Nor had they attempted the problems. So the class was unable to follow what I was doing as I repeatedly filled two boards with solutions. 

    This is a waste of our time and your money. I was going to write an essay on the importance of class preparation but first I wandered over to Kirk Tuck's fine blog Visual Science Lab. He had a post titled 

    Showing Up Ready to Shoot Means More than Just Packing Gear

    Kirk is a pro photographer based i Austin. His blog has attracted millions of hits from all over the world. 

    His point is that one does not just show up with camera and lights in hand for the shoot. There is much much more involved in preparation for the shot. Here he describes what he did preparing for a food shot for the Hilton in Austin.  He makes his point well. One can readily grasp why he is a successful photographer. 

    And it matters not what the topic is, photography, tennis, golf, making movie, or studying accounting. Preparation is the key. 

    Our new President is focused on a a Model for Student Success. I don't know what her model will finally look like but we can easily identify many necessary components. 

    Get familiar with the syllabus.

    Read the book, take notes, outline the learning objectives

    Work the sample problems until you can complete them without look at the answer. 

    Bring questions to class. 

    Read other accounting blogs

    Subscribe to e mails from accounting firms. 

    Join a professional accounting group as a student member, you will receive loads of great information in their e mails.

    Read the websites of accounting firms that offer free information which is constantly changing. 

    And be sure to read Kirk's post. Notice how thorough he is. 

     

  • Professor Elam

    Revenue Recognition

    Thursday July 23, 2015

    Thursday July 23, 2015

    Check ou this Revenue Recognition Seminar. This is  indicative of the sweeping changes involved in the new ruling. I have mentioned in class that the EY presentation on this topic runs some 177 pages. 

  • Professor Elam

    Thinking Outside the Box

    Thursday July 23,  2015

    TAMUSA graduate Ed Rios and reader of this blog made a great post, here is his suggestion for MCD and its problems. 

    Indeed WMT has targeted San Antonio in its battle with HEB. WMT built just the store Ed describes in the trendy Shavano area in NW San Antonio. It sits back form the street in a secluded setting and even has its own new street connecting two larger streets. I will have to check it out. 

    Maybe MCD should take a page out of Wal Mart's play book? Wal Mart has recently started opening smaller, I think far nicer and better staffed, "neighborhood market" stores as a means to continue its growth into more developed and nicer areas where more expensive real estate and the idea of a big box stores don't sit well. A Trader Joe's type area. These stores are much nicer, cleaner, properly maintained and not the chaotic mess the larger stores are. Maybe MCD should pursue a similar model of smaller, better customer experience, strip center type restaurants. Cheaper to open which would entice more franchisees. just my two cents.

  • Professor Elam

    Certified Ethical Hacker

    Thursday July 23, 2015

    I discuss the importance of certifications a great deal in class. I just discovered another one, I am not making this up! Check out Certified Ethical Hacker CEH.

    I think Certified National Defense Architect CNDA which is a government designation has a better sound to it but..

     

    Here is an interesting link on hacking techniques.

  • Professor Elam

    MSFT Writes Down Nokia Deal

    Wed July 22, 2015

    MSFT wrote down 80% of its $9.4 B Nokia buy out.  MSFT had to buy Nokia as its phone was the only one using a MSFT system. But Nokia is no powerhouse in the phone business anymore. When the carrying value of assets falls below the amount on the books, firms must write the asset down. The result is a  loss at MSFT. Other earnings fell. 

  • Professor Elam

    Accounting Scams

    Monday July 20 2015

    This is a good article on accounting scams.

  • Professor Elam

    HAL Earns Six Cents this Quarter

    Monday July 20,  2015

    HAL earned six cents in the most recent quarter.  This comes on the heels of HAL constructing its third largest facility in the world just south of the Brooks City Base Campus.  At an FEI meeting a couple of years back, the HAL CFO bragged about the size of the facility. 

    This is a socionomic clue that a top in mood, and oil prices was near. The Skyscraper Index holds that large projects are imagined and built during peak boom periods, or peak social mood if you will. By the time  the project is completed, the boom is over and typically the project opens the very worse time. That would be the case for the HAL, Baker Hughes, and Weatherford  new operations in the Eagle Ford. 

    I did not bother to make that point to the CFO as no doubt he would have dismissed the idea. 

  • Professor Elam

    Market Tops and Bottoms

    Weekend July 19,  2015

    How Market Tops and Bottoms are Formed

    Market tops take a long time to form and then fall. Why?  Market tops happen among positive social mood. Eventually the number of stocks still participating in the up move dwindle. This is failed leadership and evidence of a  divergence. What then happens is that more and more participants hold fewer and fewer stocks. Eventually we run out of buyers or true believers. That has already happened in the Transports, Utilities, REITs.  {Positive mood  lasts longer than negative mood. 

    The commodity or stock is out of favor, which energy certainly is now. This usually leads to a final moment of negative capitulation when participants throw the shares of whatever out the window. As the selling climaxes, the shares are held in fewer and fewer hands and the sellers outnumber the buyers on the way down. Once the selling is exhausted, only  a few players are in control. Then when someone wants to buy the price shoots up quickly as the sellers are in total control of the market, i.e., only a handful own most of the shares. They can name their price. 

    Check out the July 19 weekend post at 

    The Market Perspective.