I didn’t realize I was on vacation; it sort of sneaked up on me.
May brought the turn of the weather in Michigan, and it is just so beautiful out that I cannot bring myself to sit in front of a computer. So I am out of work until next Friday and spent the entire day doing some gardening around the house.
Gardening is one of those activities that calms me down. It’s back burning work and tires you out. You’re under the sun with fresh air bending around you. Much superior to any time spent in a stuffy office, where the air circulation was modeled after a submarine.
I’ve been keeping a soft eye on the markets and generally speaking here is my position: foreign sovereign bonds have inverted themselves sharply from showing severe distress to a much more favorable normalcy. Paying countries to hold onto your money is terrible practice and a bad omen. The EURUSD has also been acting favorably, staging a rally off the lows. These things could be suggesting a bought of good data out of Europe finally, which is being priced in by markets (or not). For the moment, they have led a strong rebound in oil and have helped reverse the oil glut which has been building in the US.
The oil build we’ve been seeing has two components. The first component is what you might call global demand for oil, which is in question following weak data out of China, Europe, South America, North America…okay why am I writing this?…the whole planet Earth.
But the second component is much more localized. An uncompetitive dollar has actually acted to erect a trade wall around the US, which is in a sense trapping our oil products domestically. This has led to weak demand for US industrials and so our oil is pooling.
Global demand will still weigh down things, but if the second point is corrected, then global demand notwithstanding you could still see the US oil glut correct itself very quickly.
A spate of oil inventory draw downs and good news for US oil names is not then directly dependent on strong growth numbers around the globe. That would obviously help but adjustments to the dollar could serve much the same purpose.
That’s more or less why US oil names have rallied so hard recently.
For my part I am hunkered down and will be avoiding making transactions. But I like what I’m seeing in terms of the EURUSD and bonds.
Something to be cautious about however; you could also argue that low bond yields have forced pensioners and fixed income positions to take on additional risk by chasing stock prices for dividends to supplement yield. In that sense, stocks are rigged with a weak element that could quickly cascade. Positive bond yields are good, but too much yield is bad. If yields run too high, I wouldn’t be at all surprised if it sparked a significant correction.
For the moment, the negative yield environment was a pretty recent phenomenon, so let’s not get ahead of ourselves. But we do need to see bonds set a floor at some point in the not too distant future or my optimism could turn dark in a hurry.
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I know you’re on vacation, but I was wondering if you caught the HCLP earnings conference call?
I skimmed it. Big move was basically HCLP ceded some ground to their customers to help ease the pain from the lower oil prices. But they traded those lower costs with longer contract terms or greater sales volumes down the road. Of course, does “down the road” pan out? If not then HCLP could get whacked but how is that not typical business risk?
Seeing as WTI just passed $60 again, I’ll take my chances.
Thanks. I’ve been making monthly purchases in it for a few months now (cost base now $38) and appreciate your input.
Of course. But don’t forget my cost basis is in the low $20’s. We have different pain tolerances.