Market Update – 18 Months In Review

559 views

2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.

Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.

We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.

That being said, I haven’t yet seen any indication that the real economy is retracting.

Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.

This should do wonders for the economy.

With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.

A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.

Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.

Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.

Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.

Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.

Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.

Tricky Tricky

1,234 views

I admit it; you had me pretty worried there.

What with oil prices plunging to lows not seen since last the entire planet was on the precipice of economic catastrophe. Yes, I was sweating…profusely.

But now what do we have here? In less than a business week, oil is back. My stocks are roaring back to dead life from a state of living death. It’s not much, but at least the putrefaction is under some amount of control.

For the moment, I am not putting any of my cash reserves to work. I want the dry powder in case we go Mad Max again.

But this is constructive. Greek 10 years are yielding 8% again. China will get it under control, much to the dismay of Zerohedgers. It’s not difficult to take away freedom from people who barely have any to start with.

iBankBonds

1,600 views

Effective immediately, the 9th Floor shall be converting itself into a bond trading desk.

Under martial penalty, every comment made herein must contain in the least sense an oblique mention of at least one of the following terms:

1) Coupons (shopping excluded)
2) Face value (sexist remarks made in good fun will be admissible)
3) Maturity (not in the passing of the prepubescent into adulthood sense of the word)
4) Yield (no crop talk)

Effective immediately, every other post will just be a chart of US Treasuries.

Welcome to hell, boys and girls.

Will The Fed Save Us?

1,529 views

The markets are in full on collapse mode. 3% declines is what 2009 was made of. Even 2011 I don’t recall as being this intense – although time mutes the pain.

But will the Fed arrive to rescue us? While I deeply hope for this outcome, I’m hesitant to count on it. I see several impediments to a Fed rescue.

The first is that Yellen was very intricately involved in the first set of rescues. Yellen is a dove; but she is a dove who believes in econometrics and the ability of a central authority acting under imperfect knowledge to do good in the economy.

The trouble with that perspective is that it so frequently is revealed to be wrong. This is the central point of non-linearities in real dynamic systems, which is fundamental to the work of the Austrian economists.

Where I am afraid we are going to run into trouble is by sanctioning the first round of interventions, Yellen the dove had a buy-in on the outcomes. If she intervenes, it will cast doubt on the first round of Fed actions. Will Yellen be able to do such a thing just to protect the stock market? Or will she tell herself everything is fine, to shore up the belief that she and her peers knew what they were doing in the first round?

My second concern is that, although the market is in a state of anguish, the economy is not clearly following the path yet. A major shift in stock ownership occurred alongside the Great Recession, and so the regular citizen may be more insulated to negative stock performance than five years ago.

It might be just us out here.

Would the Fed intervene to save professionals? How much bearing does this even have on the average blue collar citizen? I am concerned that the severity of the Great Recession means the knockoff shock waves may not justify additional aid.

Of course, on the other side of things, the stock market is still heavily owned by politically connected and economically powerful persons. That has never hurt much in the past. I’d say that’s still a positive, the current and apparent political upheaval against such behavior notwithstanding.

The Beat Down Goes On

1,436 views

I have bad news for you, which is that if we’re going to judge this on the level, the market is pricing in recession.

I know it sounds bad, but that is just the way things are. This is no longer about the Eurozone; even Greek debt has come back in. The EURUSD is back above where it was. Greece has been bailed out again. The entirety of the Eurozone crisis fears that were occurring at the beginning of this meltdown have subsided…but the meltdown endures.

China took that baton and is running with it. And I am sure there’s a Brazil or Vietnam in the wings waiting for their turn next.

Energy pricing is – collapsing is too weak of a word – I don’t know how to call it. Oil is gone. Coal is gone. Nuclear is gone. Solar is gone. If you’re looking for a leading indicator, that may not be an optimistic one.

I don’t know. For the moment I’ve got enough cash to be composed about this, but these are tremors we haven’t felt since 2011 at least.

The Oil & Gas Consolidation Is Coming

1,453 views

We are soon to enter the next phase of the oil price collapse, which will take the form of industry wide mergers and acquisitions, stitching together failed businesses where the cash rich emerge on top.

Although I have been perhaps loyal to a fault with this industry, I have also warned of being on the wrong receiving end of just this very development from the start. Following BAS’ latest earnings report, management talked about this looming reality at some length.

The entire industry is failing and some are on the cusp of insolvency. Although the Saudi’s are failing in their alleged goal of destroying the US space, there will be no dawn for many of these highly leveraged and small players. BAS and others are preparing to pick through the carnage and buy out their assets for pennies on the dollar.

Those who have not maintained their asset rollover plans will be discarded via hard default; no savior come for them.

Prepare yourselves…

Market Update – 18 Months In Review

559 views

2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.

Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.

We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.

That being said, I haven’t yet seen any indication that the real economy is retracting.

Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.

This should do wonders for the economy.

With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.

A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.

Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.

Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.

Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.

Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.

Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.

Tricky Tricky

1,234 views

I admit it; you had me pretty worried there.

What with oil prices plunging to lows not seen since last the entire planet was on the precipice of economic catastrophe. Yes, I was sweating…profusely.

But now what do we have here? In less than a business week, oil is back. My stocks are roaring back to dead life from a state of living death. It’s not much, but at least the putrefaction is under some amount of control.

For the moment, I am not putting any of my cash reserves to work. I want the dry powder in case we go Mad Max again.

But this is constructive. Greek 10 years are yielding 8% again. China will get it under control, much to the dismay of Zerohedgers. It’s not difficult to take away freedom from people who barely have any to start with.

iBankBonds

1,600 views

Effective immediately, the 9th Floor shall be converting itself into a bond trading desk.

Under martial penalty, every comment made herein must contain in the least sense an oblique mention of at least one of the following terms:

1) Coupons (shopping excluded)
2) Face value (sexist remarks made in good fun will be admissible)
3) Maturity (not in the passing of the prepubescent into adulthood sense of the word)
4) Yield (no crop talk)

Effective immediately, every other post will just be a chart of US Treasuries.

Welcome to hell, boys and girls.

Will The Fed Save Us?

1,529 views

The markets are in full on collapse mode. 3% declines is what 2009 was made of. Even 2011 I don’t recall as being this intense – although time mutes the pain.

But will the Fed arrive to rescue us? While I deeply hope for this outcome, I’m hesitant to count on it. I see several impediments to a Fed rescue.

The first is that Yellen was very intricately involved in the first set of rescues. Yellen is a dove; but she is a dove who believes in econometrics and the ability of a central authority acting under imperfect knowledge to do good in the economy.

The trouble with that perspective is that it so frequently is revealed to be wrong. This is the central point of non-linearities in real dynamic systems, which is fundamental to the work of the Austrian economists.

Where I am afraid we are going to run into trouble is by sanctioning the first round of interventions, Yellen the dove had a buy-in on the outcomes. If she intervenes, it will cast doubt on the first round of Fed actions. Will Yellen be able to do such a thing just to protect the stock market? Or will she tell herself everything is fine, to shore up the belief that she and her peers knew what they were doing in the first round?

My second concern is that, although the market is in a state of anguish, the economy is not clearly following the path yet. A major shift in stock ownership occurred alongside the Great Recession, and so the regular citizen may be more insulated to negative stock performance than five years ago.

It might be just us out here.

Would the Fed intervene to save professionals? How much bearing does this even have on the average blue collar citizen? I am concerned that the severity of the Great Recession means the knockoff shock waves may not justify additional aid.

Of course, on the other side of things, the stock market is still heavily owned by politically connected and economically powerful persons. That has never hurt much in the past. I’d say that’s still a positive, the current and apparent political upheaval against such behavior notwithstanding.

The Beat Down Goes On

1,436 views

I have bad news for you, which is that if we’re going to judge this on the level, the market is pricing in recession.

I know it sounds bad, but that is just the way things are. This is no longer about the Eurozone; even Greek debt has come back in. The EURUSD is back above where it was. Greece has been bailed out again. The entirety of the Eurozone crisis fears that were occurring at the beginning of this meltdown have subsided…but the meltdown endures.

China took that baton and is running with it. And I am sure there’s a Brazil or Vietnam in the wings waiting for their turn next.

Energy pricing is – collapsing is too weak of a word – I don’t know how to call it. Oil is gone. Coal is gone. Nuclear is gone. Solar is gone. If you’re looking for a leading indicator, that may not be an optimistic one.

I don’t know. For the moment I’ve got enough cash to be composed about this, but these are tremors we haven’t felt since 2011 at least.

The Oil & Gas Consolidation Is Coming

1,453 views

We are soon to enter the next phase of the oil price collapse, which will take the form of industry wide mergers and acquisitions, stitching together failed businesses where the cash rich emerge on top.

Although I have been perhaps loyal to a fault with this industry, I have also warned of being on the wrong receiving end of just this very development from the start. Following BAS’ latest earnings report, management talked about this looming reality at some length.

The entire industry is failing and some are on the cusp of insolvency. Although the Saudi’s are failing in their alleged goal of destroying the US space, there will be no dawn for many of these highly leveraged and small players. BAS and others are preparing to pick through the carnage and buy out their assets for pennies on the dollar.

Those who have not maintained their asset rollover plans will be discarded via hard default; no savior come for them.

Prepare yourselves…