Felix Salmon

The ever-falling BP share price

Felix Salmon
Jun 9, 2010 18:34 UTC

With its latest stock-price plunge today, BP has broken three important psychological levels: it’s below book value, it’s trading at less than half of its 52-week high, and it’s worth less than $100 billion. The culprit this time around would seem to be the dividend. The company has been paying out a steady 84 cents per share per quarter, and that payment is now in jeopardy; as recently as last week, it seemed to be safe.

How does the retention of $3.36 in annual dividend payments justify a $4.50 fall in the share price? Well, so long as BP holds on to that money and doesn’t transfer it to shareholders, it can be forced to transfer it elsewhere instead — for instance to workers who were laid off from other oil companies upon the introduction of the moratorium on off-shore drilling. BP’s coffers are not at all a safe place to store shareholders’ cash: they can be raided by all manner of legal and regulatory eventualities.

But there’s another dynamic at work here: BP and Shell between them account for 50% of the dividends paid by UK companies every year. It seems quaint, but there really are a lot of far-from-wealthy people in the UK who live off their dividend income, and those people constitute a surprisingly large part of BP’s shareholder base. If BP suspends its dividend, the only way they can get money from their stock is by selling it.

If BP doesn’t suspend its dividend, it would seem to be approaching screaming-buy levels right now: a $3.36 dividend on a stock worth $30.42 is a dividend yield of 11%. Plus of course there’s the possibility of an exit via takeover. But the fact is that the government can and will trump all of those considerations; it’s certainly not going to allow BP to declare an enormous special dividend, sell most of its remaining assets to Exxon, and then plead bankruptcy when the cleanup bill arrives. If such a thing were possible, BP stock would surely be worth a lot more than it is right now. But, thankfully, it’s not.


It took 17 years for Exxon to be finally penalised for Valdez. I would consider this the lower estimate for BP.

Why? Well BP has more avenues to fight this than Exxon mainly because the American contractors it got in to do the drilling and well prep were the ones who seemed to have slipped up.

The clean up will actually happend far quicker than people expect

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Gold: The Glenn Beck indicator

Felix Salmon
Dec 7, 2009 17:19 UTC

Ken Vogel’s very good article on the rip-off gold merchants sliming their way around the broadcast punditosphere never attempts to guesstimate the total amount of money that’s changing hands here. But it’s clear that the gold bubble is bringing out some most unsavory profiteers, who are signing up right-wing talk show hosts as spokesmen and selling not bullion but coins, which they can mark up to basically whatever they like.

What I’m wondering here is how much all this eschatologolical rhetoric is affecting the actual gold price. Certainly it attracts buyers:

Peter Epstein, president of Merit Financial Services, which advertises on Beck’s show, says gold retailers expect favorable coverage from commentators on whose shows they pay to advertise. “You pay anybody on any network and they say what you pay them to say,” said Epstein. “They’re bought and sold.”

Beck, who through a publicist declined to comment for this story, addressed the Media Matters allegation on his Thursday show, saying “So, I shouldn’t make money?” And he made the point that he touted gold before he became a Goldline endorser, and urges viewers to study and pray before investing in it…

“I could care less what people think of him,” Merit’s Epstein said of Beck. “We advertise on Fox because it makes the phone ring.”

If a large number of people are buying gold coins after listening to the likes of Glenn Beck, you can be sure that even more are buying GLD. And eventually demand for gold coins is itself likely to show up in a higher gold price. But this trend is going to have to run itself out sooner or later: you only load up on gold once, after which your only options are to hold or to sell.

I’m not calling a top to the gold market just because it’s fallen for two days in a row following Friday’s job report. But I’m getting that feeling you get when your cab driver starts talking about buying calls on dot-com stocks, or your house cleaner turns out to have bought three single-family homes in Florida. The likes of Ron Paul have been riding this train for a long time. But now that pretty much every single right-wing pundit has jumped on board, I can’t believe it has much further to go.

(HT: Drum)


Many of these folks are also complaining about Al Gore’s environmental investments, and love to note that every time he advocates some anti-carbon policy he’s “talking his book”; I think it’s more true of both Gore and these conservative gold bugs that they’ve put their money where their mouths are. Not that one needs cliches to describe this; they have long-standing beliefs that influence both their advocacy and their investments, and that’s not necessarily a bad thing.

As for the feelings of gold vertigo expressed in the last paragraph, I have to concur there. These things do always seem to run farther and longer than I expect them to, though.

GLD is a play on tail risk, to some extent, and physical gold — most reasonably in bullion form, but even to some degree in overpriced forms — is a play on far worse tail risk — if you really think there’s a meaningful probability that our new communist overlords are going to confiscate anything you can’t hide in the woods, durable precious goods that you can hide in the woods become a hedge on that. You can’t eat gold, though; in some ways, this is the same hyper risk aversion that you’ve criticized from two and three years ago, and while it’s prudent to look out for tail risk, it’s also prudent to recognize that you’re simply never going to get rid of all of it. If 1% of the US population is moving to physical gold, then hundreds of people with gold buried in their back yards are going to be killed in car accidents in the next few years.

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ETFs and gold speculation

Felix Salmon
Oct 8, 2009 00:11 UTC

Izabella Kaminska has an interesting take on the record-high gold price, via Bedlam Asset Management: essentially, it’s rising because the big gold ETFs, like GLD, are so incredibly easy to buy and to speculate with. Gold is now something that individuals can easily trade in and out of daily — goldbugs are no longer just hold-it-until-you-die inflation hawks and eschatologically-inclined survivalists.

The implication, according to Bedlam, is that the whole swathes of ETF-linked commodities risk being dumped en masse, if and when the current wave of momentum fizzles out:

One or more of the smaller exotics will expire. Little notice will initially be taken. After a couple more, especially if in different sectors, there will be a rush to dump them all. The good and the bad will be forced sellers alike to meet redemptions. This will lead to an avalanche of physical gold, live hogs and cocoa being heavily sold into often thin markets, causing sharp price declines.

Remember: insofar as gold is being held by speculators, it isn’t safe. And GLD alone has more than $30 billion invested in it, much of that on margin. Where would gold be if even a fraction of that sum got sold at once? I don’t like to think.


Hmmmmm ..There is a run for the doors on GLD the supply of gold can jump VERY FAST.

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Adventures in hedging, Barrick Gold edition

Felix Salmon
Sep 9, 2009 20:22 UTC

The best kind of hedge is the one like Agustín Carstens put on in Mexico: he locked in high oil prices, and made billions when the price of oil fell. Sometimes, of course, hedges don’t work out nearly so well. Larry Summers, for instance, thought he was locking in low interest rates, but then saw rates fall even lower, and ended up losing billions of Harvard’s dollars.

And then there are the hedges which just don’t make any sense at all: like Barrick Gold, which locked in low gold prices and is now spending a whopping $3 billion to unlock them at the top of the market. Anybody care to explain that one to me?


Ditto. Barrack appears to be the stooge of the banking cartel keeping gold down. $3 billion is a small price to pay. For details of how and why Antal Fekete gives great detail.
http://www.professorfekete.com/articles% 5CAEFHaveGoldBugsBeenBarrickedByTheUS.pd f

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Carstens’ task

Felix Salmon
Sep 8, 2009 21:22 UTC

Many congratulations to Agustín Carstens, who, according to Javier Blas, has managed to make Mexico $8 billion by putting on some smart oil hedges last summer:

Traders joked on Monday that Mr Carstens was probably 2009’s “most successful, but worst paid, oil manager”.

Of course, it helped that Carstens had $1.5 billion lying around last summer to pay for the hedges in the first place. But really all this financial cleverness only puts off the day of reckoning: Mexico is running out of oil revenues fast, and has no visible means of replacing the taxes currently paid by Pemex.

The tax burden on Mexican individuals and companies is low in theory and lower still in practice, and the kind of tax hikes which would be needed to even partially compensate for falling government oil revenues are politically impossible to pass. No one is more aware of Mexico’s coming fiscal crunch than Carstens, and if anybody can do something constructive, he can. I suspect, however, that no one can do anything constructive, and Mexico will be in serious fiscal pain sooner rather than later.


“….to make Mexico $8 billion…”

I having a real problem with your verb choice.

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How commodity indices broke the wheat futures market

Felix Salmon
Jun 24, 2009 16:47 UTC

Back in March 2008, Diana Henriques noted something very odd: a large number of futures contracts traded in Chicago were expiring at levels much higher than the spot cash price. She said at the time that “economists who have been studying this phenomenon say they are at a loss to explain it”.

This very odd phenomenon — which caused farmers a lot of harm — has now been explained in a 247-page report from the Senate investigations subcommittee, entitled Excessive Speculation in the Wheat Market. The main PDF is here; there are exhibits and addenda here. The culprit, it turns out, is index traders.

The rise in the basis between the futures price and the cash price is a function of the rise of commodity indices, and investors buying a basket of commodities. This affected the wheat market particularly badly, as explained in footnote 213 of the report, partly because of the ease of storing wheat:

Aside from wheat, the other commodity markets in which index traders hold a substantial share of the long open interest are the futures markets for two livestock commodities, lean hogs and live cattle. Lean hog futures contracts are financially settled, meaning that the price of the expiring futures contract is set at the price of the commodity in the cash market at contract expiration. By definition, therefore, lean hog futures and cash prices will be equal at settlement, so there is no problem with convergence. Live cattle, unlike grain, cannot be placed in storage from one contract expiration to another. That constraint means there is always an active cash market for live cattle at contract expiration that helps to force convergence.

The Senate subcommittee recommends that the futures exchanges should curb speculation in the futures market in order to bring the basis between futures and cash back down to a reasonable level. It’s coming down already, but it’s still extremely high, at over a dollar a bushel:


This whole thing reminds me slightly of the way in which the USO oil ETF helped to exacerbate contango in the oil market. And in general, it seems that attempts by investors and banks to construct financial instruments which give simple exposure to commodities have not worked very well. Chalk up another failed financial innovation.


The existence of the delivery oligopoly is necessary and nearly sufficient. That should be considered the primary cause of the failure here, even if it needed a trigger before the spreads got particularly wide in the last couple years. Making the futures cash-settled requires a way to determine the authoritative final settlement price; if it’s not too messy (in terms of performance risk) to dramatically expand the number of permitted deliverers, that would seem to me to be the sensible solution.

The inverse-floater gasoline tax

Felix Salmon
Jun 15, 2009 14:32 UTC

How to structure a gas tax? You could make it a flat X cents per gallon; alternatively (and this is essentially what a cap-and-trade system does, too) you could make it Y%, with the tax increasing with the price of gasoline.

Today, Jim Surowiecki comes up with a third option, where the tax decreases when the price of gasoline goes up:

Rather than leave so much of our fate to chance, we’d be better off doing what politicians always say they want to do: lessen the U.S. economy’s dependence on oil. One step toward that would be to phase in a gas tax designed to smooth out oil’s spikes and plunges by keeping the price of gasoline fixed (the tax would rise when the price of gas fell, and vice versa).

Surowiecki makes a strong case that consumer behavior, when it comes to reducing gasoline consumption, only really changes when there’s a spike in gas prices. As a result, his proposal would seem designed to have the least possible effect on gasoline consumption, and on our dependence on oil. Sure, it’s a sensible way of raising government revenues and reducing the fiscal deficit.

Either you want to effect consumer behavior and reduce gasoline consumption — in which case you actually welcome price spikes. Or else you want to smooth out price spikes, in which case you slowly boil the frog (to use one of the stupidest metaphors ever) and keep consumption high. But you can’t have it both ways. Which is it to be, Jim?


@ KenG:

I had assumed that Surowiecki didn’t mean “fixed” literally, since it’s so clearly a bad idea for the reasons you mentioned above. Maybe I was wrong. Anyhow, it seems like we agree on substance.

My point still stands about local (or short-term) pressures, though: if the tax is calibrated to an index of gas prices across the country (rather than case-by-case), there would still be downward price pressure on individual suppliers.

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Cash-for-clunkers gallons-per-mile calculations

Felix Salmon
May 8, 2009 19:05 UTC

Ryan Avent and the MPG illusion both examine the “cash-for-clunkers” bill from the perspective of how much in the way of carbon emissions will actually be saved when someone takes advantage of it. But there are a few sums missing in these posts, so I thought it would be worth filling them out. Here’s Ryan, for instance:

For passenger cars, the incentive is reasonably ambitious: those moving from less than 18 mpg to better than 22 mpg qualify for $3,500 for a four mpg improvement and $4,500 for a 10 mpg improvement.

But standards quickly decline as you move up in size. For SUVs and light trucks one qualifies simply by moving from below 18 mpg to above 18 mpg. A $3,500 voucher is available for an improvement of just two mpg, while a mere five mpg improvement gets you the full $4,500 available.

The full table is here, but only in MPG form. In terms of gallons of fuel used per 100 miles, things look a bit different. Here’s how things work out in useful gallons per mile, rather than silly miles per gallon.

To get a $3,500 voucher by trading in a car, you need to move from 18mpg to 22mpg — which is an improvement of 1 gallon per 100 miles.

To get a $3,500 voucher by trading in a small SUV/truck, you need to move from 16mpg to 18mpg — which is an improvement of 0.7 gallons per 100 miles.

To get a $3,500 voucher by trading in a large SUV/truck, you need to move from 14mpg to 15mpg — which is an improvement of 0.5 gallons per 100 miles.

To get a $4,500 voucher by trading in a car, you need to move from 12mpg to 22mpg — which is an improvement of a whopping 3.8 gallons per 100 miles.

To get a $4,500 voucher by trading in a small SUV/truck, you need to move from 13mpg to 18mpg — which is an improvement of 2.1 gallons per 100 miles.

To get a $4,500 voucher by trading in a large SUV/truck, you need to move from 13mpg to 15mpg — which is an improvement of 1 gallon per 100 miles.

So Ryan’s absolutely right: the criteria for SUVs are much weaker than the criteria for trucks. Why do you need to improve by 3.8 gallons per 100 miles in order to get the $4,500 voucher on a car, when you can improve by just 0.5 gallons per 100 miles in order to get a $3,500 voucher on a large truck? It doesn’t make a lot of sense.


What if I own a 1985 Volvo that supposedly gets a combined 20 MPG according to fueleconomy.gov, but is definitely polluting the environment due to the age of the car? Shouldn’t it matter that my car leaks fluids and is definitely polluting the environment even if avg fuel economy according to the website is 20MPG?

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Toxic asset datapoint of the day, Lehman edition

Felix Salmon
Apr 14, 2009 14:01 UTC

We knew there was a lot of nuclear waste on Lehman’s balance sheet. But we didn’t know that was literally true:

Lehman Brothers Holdings Inc. is sitting on enough uranium cake to make a nuclear bomb as it waits for prices of the commodity to rebound, according to traders and nuclear experts.

At least uranium can in theory be used as a force for good, in nuclear power stations. Which is more than can be said for CDO-squareds.

(Via Wiesenthal)


I just read an article in the Sydney Morning Herald, it says that China is building 30 nuclear powerplants and that Chinese companies are lining up to invest in Australian uranium mining and exploration companies.

Analysts warn China’s nuclear expansion will not succeed unless it secures enough uranium. Reason enough to invest in uranium, as demand and price most probably skyrocket in the near future.