NWE- the shell and possible 20 bagger

**xynz** · 16-08-2007, 10:32 PM

This correction has been a long time coming. It's mainly because of the smoke and mirrors that have been used to keep the US economy going.

Remember the Enron scandal? Well, the people who've been running the US for the last 6 years are even less honest.

The US has been steadily exporting production capacity, while increasing its consumption: this has led to a huge trade deficit. The only thing the US consistently produces for export is IP: software, music, movies and TV. Their cars are crap; Toyota has overtaken GM to become the world's #1 auto manufacturer.

The US had a real-estate boom, like we've had in NZ. But in the US, the boom was driven by low mortgage interest rates, rates you'll probably never see in NZ. Back in 2004, my mom bought her Florida apartment with a 15 year mortgage that has a fixed interest rate just a little below 5%. Can you imagine what would happen to the NZ real-estate market, if borrowers could get a 30 year mortgage that was fixed at 6.5% interest? On top of that, the interest is tax-deductible in the US.

Everybody and their dog was getting a mortgage to buy a house; real-estate prices were rocketing upwards. The people who already owned their homes, saw their home equity increase by tens and hundreds of thousands of dollars. So, they took out a 2nd mortgage at about 7% and went on a spending spree. That party ran for almost 5 years....

The problem was, the housing market became saturated. Everyone who could buy a home, bought one. To keep the party going, lenders began to lend money to people who shouldn't buy a home.

People who couldn't afford to pay a mortgage came into the market by getting ARMs (Adjustable Rate Mortgages). The ARM is like a standard Kiwi mortgage: the rate goes up and down. The problem with the US ARMs is that they were sold to the buyers with low teaser rates: like 4%. Some mortgages gave buyers payments they could afford by giving them a year or so of interest only payments . Other mortgages were even worse: they were negative amortization loans, where the initial payments couldn't even keep up with the interest and the excess interest was added to the principle.

This was the foundation for the current sub-prime and the alt-A mortgage crisis. Now that the ARMs are readjusting to the higher rates, the people who shouldn't have bought are defaulting and losing their homes. That's putting more homes on the market.

Once these defaults began, the lenders tightened their lending criteria, so that took buyers out of the market.

And the home builders couldn't just stop the projects that were already in the works, so they finished those up and that put even more homes on the market.

A glut in the supply and a drop in the demand: the US real-estate market is now in a freefall.

How did this affect the global credit market? Well, billions of dollars in mortgages were packaged together into CDOs: Collateralized Debt Obligations. These were sold to large investors, as AAA bonds. What could be safer than an investment that was based on the value of real-estate?

The problem is, not only are these investments failing to deliver their returns, but their collateral is evaporating. The value of the homes used as collateral is plummeting. Large investment funds are now writing off billions in assets, because their AAA CDOs have turned out to be no better than DDD junk bonds.

Equity is disappearing and liquidity is disappearing along with it.

70% of the US GDP is driven by consumer spending. US consumers have gone heavily into debt to maintain their lifestyle, they've had a negative savings rate for the last 5 years or so. That debt was enabled by the increase in their home equity...but now that's gone. Where will the US consumers find the money to keep spending? Their pay packets? Not likely: stagnating pay is the reason why they've gone so far into debt, in the first place.

The US share market was not only riding on the home equity driven consumer spending boom, but also on cheap credit from the US Federal Reserve (their central bank). The Fed was supplying cheap money for M&A activity. That was driving up share prices, just like the cheap mortgages were driving up the value of the real-estate market.....

Now, the cheap debt party is ending. Liquidity is evaporating. The only way the Fed can keep the party going, is to keep shoveling in the cheap commercial credit. But how long can that go on for? How many more dollars can they push into the market, before the already heavily over-valued USD, collapses?

The USD has undergone a "graceful" collapse over the last 5 years or so: it's already lost about 40% of it's value against the Euro.

There were three things keeping the USD afloat.

#1 It's been the reserve currency for global commerce. This has been buttressed by an OPEC policy that requires oil be paid for in USDs. This creates a demand for USDs. But, the Euro has been overtaking the USD in this regard. Global cash transactions and bond offerings in Euros has surpassed those in USDs.

#2 China has purchased about 1 trillion dollars in US debt. This sucks up some of the USD over-supply. China has also artificially inflated the value of the USD by a dejure fixed exchange rate. The Yuan is pegged to the USD.

#3 Japan has purchased about 600 billion dollars in US debt, also sucking up some of the supply. Japan helps to artificially inflate the USD by practicing a defacto fixed exchange rate. The Yen floats, but all Japanese goods sold in the US have a fixed USD price.

Over the last few years, nations have been very slowly shifting their reserves away from the USD. Nobody wants to start a run, because then everybody gets hurt. So far, the movement has been orderly.

But, the USD has started its fall and it hasn't hit the bottom yet. The credit crunch has begun and it is going to get worse: as the US sub-prime and alt-A crisis escalates (we've only seen the beginning of the interest rate reset wave).

What is happening right now is a GRACEFUL collapse of an unsustainable economy. But, if it gets out of control, then it could get very, very ugly.

"China threatens 'nuclear option' of dollar sales"

http://www.telegraph.co.uk/money/mai...nchina107a.xml

**Serpie** · 20-08-2007, 06:43 PM

Phase 1 of "Operation Get All of Serpies Money Back" successfully executed today with a nice rally from NWE.
Now just need Phases 2-29 to go according to plan, and I'll be back to where I started from 3 weeks ago.

NWE up 16% today, and an AED announcement confirming the booking of a second FPSO for Puffin.

On the flip side Matty was once again on the ball with the inside word that Front Puffin FPSO still not seaworthy.

Let's hope for a flat (or better) night on the DOW to allow some support to build in the mid 20's.

**seaosh** · 20-08-2007, 06:54 PM

I topped up on Thursday when it was at 21 and 22 cents. Looking good in retrospect.

**Tech Step** · 30-08-2007, 03:33 AM

People still holding this one?

If you look at their chart there is a very nive inverse head and shoulders formation which should lead to a reversal in the downward trend...

**seaosh** · 30-08-2007, 09:42 AM

I'm still in. I sold the ones I picked up when it dropped back to 21-22 cents, but I've still got the rest of my holding.

**mamos** · 04-09-2007, 12:18 PM

Nigel Wilson, Energy writer | September 04, 2007

PRODUCTION hopeful AED Oil has given market sceptics cause to re-think after the arrival of its new floating production, storage and offtake vessel off the west Australian coast.
FPSO Front Puffin, operated by the British-owned group Aibel which has Norwegian headquarters, is being loaded with supplies and undergoing final engineering work and certification off the burgeoning exploration supply base at Truscott, a former World War II air base in the far north of Western Australia.
David Dix, chairman of AED Oil, believes initial oil will flow from its 100 per cent owned Puffin field in Australian waters in the Timor Sea about 700km west of Darwin by about the middle of September.
The field is about 80km south of the Challis and Jabiru oil fields and about 25km from the Skua field.
Puffin production will ramp up gradually to a design capacity of 30,000 barrels a day.
The leased Front Puffin is a converted oil tanker, which that has just been refitted in the Keppel yards in Singapore with a gas processing suite on its topside. It has a storage capacity of about 650,000 barrels, and aims to supply shuttle tankers to refineries in the Asian region.
It attaches to a swivelling buoy attached to a riser at Puffin through a "moon pool" in the bottom of the vessel's hull rather than more usual bow turret used in Australian FPSOs. The moon pool is a patented system involving a big steel cylinder with a central opening.
Both systems are designed to allow the vessel to disconnect from the field on the approach of bad weather.
AED Oil was listed in May 2005 and is operator of the Puffin field in Northern Territory permit AC/L6.
"The arrival of the Front Puffin represents a major achievement for the company," Mr Dix said. "It's involved a major effort by everyone associated with AED Oil and it's a tribute to them that we have got this far in such a short time."
AED Oil, though one of the best-performing stocks on the exchange in the past year, has attracted some scepticism because it has no track record as an oil or gas producer.
Puffin was found by ARCO in 1972 and has had a number of owners, before finally being bought by AED Oil for $3.5 million in vendor shares.
AED Oil believes that with Puffin and the Talbot field about 65km to the west, which it hopes to bring into production next year, it will recover more than 100 million barrels of oil.
Mr Dicks says marketing of initial production from Puffin has been sold to the French giant Total, which is increasingly active off northwest Australia in the Timor Sea and the Browse Basin.
The first cargo of the light sweet crude - rated at 44 API gravity, similar to the Asian benchmark Tapis - has been pre-sold by Total to Caltex and will be shipped to its refineries at Kurnell in Sydney and Lytton in Brisbane.
AED Oil anticipates that about 10 million barrels of oil will be produced in the first 12 months of the field's production life.
Currently the Puffin Oil can be sold for more than $100 a barrel.
Initial production from the Puffin field will be from the Puffin-7 subsea well in the north-east area of the field, with a second well, Puffin-8, being brought on later in the year.
AED Oil estimates proven and probable reserves from this area alone will be about 40 million barrels of oil.
Nigel Wilson visited FPSO Front Puffin as a guest of AED Oil