Refining margins pummeled

From ISI:

"*Our model for average US gross refining profit margins dropped sharply in the recent week taking the figure about 40% below the corresponding year-ago level and 55% below the peak number posted in mid-May.

*The most recent week's decline in US refining margins stemmed almost entirely from gasoline - cash crude prices were actually up about 30 cents/bbl on the week while gasoline was down $3.55/bbl.

*We expect US refining margins will see further erosion as we move towards September owing primarily to the seasonal switchover refiners make to "winter grade" gasoline and a normal sharp drop-off in gasoline demand after August.

*Foreign refining margins are still showing a pattern suggesting soft demand trends. Both the European and Far East gas cracks have nose-dived.

*Tanker rates for barrels moving from the Persian Gulf posted multi-year lows in the recent week reflecting the impact of displaced OPEC oil owing to higher non-OPEC supply and weaker than expected global oil demand."

SLM deal in big trouble

The subsidy cuts were larger than expected, the debt markets are tightening up and now a director has sold a lot of shares at $51. That's obviously not a strong vote of confidence for a deal getting done at $60, or even $55.

Weak Oil Demand

From ISI:

"* Based on our estimate for end-June OECD storage and figures for world oil supply, we estimate 2Q global demand averaged 84.2 million b/d which is virtually the same as the corresponding year-ago figure. Our working forecast had been for 1.4 mm b/d of growth.

* Having again lowered our 1Q 2007 global demand figure, the estimated 2Q figure left us having to reduce our full-year 2007 world oil demand forecast by 0.5 million b/d.

* While there seems to be an over-abundance of market focus on supply, it seems to us that there has been virtually no attention paid to the demand side of the ledger. What's even more notable is that since 2004, the biggest adjustments we've made to the oil balance have all been downward demand revisions."

So we have an oil glut, rising non-OPEC production, rising OPEC spare capacity and now evidence of weak demand. Why are prices so high again???

Welcome Readers

I'm getting a ton of traffic from the Yahoo FMD message board after somebody found my blog and linked to it. So, welcome new readers. FMD is by far my largest position and I'll be writing more about it in the future. I'm extremely open to comments and making friends so don't hesitate to post.

The Great Crude Oil Glut

From ISI:

"There had been indications that Saudi Arabia's Khursananiyah project (which adds 800,000 b/d of capacity) would start this month, or 6 months ahead of schedule. Indications are that the project will stay on the original schedule and ramp up in December.

We think the issue about not bringing on Khursananiyah earlier than planned relates to a decline in the demand for Saudi oil over the past year owing to weaker than expected demand growth and higher non-OPEC supply. This is evident in tanker rates."

Yet the price of crude keeps going up....ARGH!!! At least the futures curve is flattening which suggests investors are becomming less bullish on the long-term price outlook for crude....about time! This swindle has persisted for long enough!

CDO Nightmare

I recently found this article about the CDO market that's worth your time if you own any stocks that securitize or are involved in subprime issues. It's important to understand the conflict of interest between the credit rating agencies and the issuers, and the subjective (stale!) pricing that delays the crash. There is still a lot of subprime mortgage crap out there that hasn't been marked down and liquidity is drying up.

First Marblehead (FMD) - More Misleading Research

From Bankstocks.com:

By: Zach Maxfield

"SELL-SIDE RESEARCH CAN BE PRETTY DARN AWFUL—PART 3,724: Thomas Weisel’s Mark Sproule put out a note on Tuesday (sorry, no link) that says that four of First Marblehead’s nine trusts are running well north of the 8% consolidated payment rate that the company assumes. That would be worrying—except that Sproule’s methodology is all messed up. Apparently he arrived at his CPR number by looking at the change in number of loans in the trusts last month and annualizing it, and calling it the result prepayment speed. There’s tiny little problem with this technique: something like 60% of the change in the loan count in a trust is due to defaults, not prepayments. Sproule’s numbers are meaningless.

Anyway, here’s what he did (using the 2004-2 trust as an example):

Beginning loan count: 60,995
Monthly change in loans: -490
Times 12 months: 5,880
Divided by beginning loan amount: an “implied CPR” of 9.64%

Here’s how the numbers really work:

Other Adjustments (cancellations, consolidations and other): $1.47 million

Coincident Losses (change in cumulative claim payments made): $2.38 million ($21.6 million less $19.3 million)

Accordingly, the total loan count decline would be split between Other Adjustments (38%) and Coincident Losses (62%).

Are prepays and defaults something that investors ought to be vigilant about? Of course! But this particular piece of analysis simply doesn’t provide much help on that score. At all."

Quite the contrary. It looks like prepayments are running lower than expected. There was also this little gem by Matrix on June 26:

"First Marblehead’s profit margins could contract going forward due to the probable reduction in subsidies to student loan providers, Matrix Research adds."

It's clear that Matrix doesn't even understand FMD's business model because the company only deals in private loans, not government loans!

With all of these misconceptions still hanging around it's no wonder the stock is still ridiculously cheap.