The Big Question Then: How To Play EU QE?

1,313 views

The Swiss bank just announced that the ceiling they have been maintaining against the euro is to be dropped. That would make sense, since the euro is now trading below 1.17, down from almost 1.40 just earlier. In terms of the exchange rate, that had to be getting very expensive.

But the timing here should be viewed as a sign that the ECB is really about to start QE. This should be the stance because if they don’t, the impact would be minimal, but if they do you can’t be on the wrong side of the trade.

In terms of what this QE will look like…well, that is the question. What is the ECB going to buy? Not public debt, surely. How much more financing can these governments stomach with yields already negative in many countries. Even the worst countries, like Greece, are borrowing at rates that an average citizen would envy.

My guess here is two fold: (1) they buy up private financial assets similar to the mortgage program the Fed had in place, but that it will center on short term bonds, while also working with banks to create a long term financing window (EU companies and banks in particular have notoriously short term financing arrangements) and (2) they take the opportunity to absorb whatever mechanisms exactly they have been using, before now, to hide the massive debt loads that should have been coming due over the past three years.

If you forgot, Europe ended up pulling some master BS, using a combination of trade accounts to gobble up the garbage so that the markets wouldn’t have to see it default. I’m hazy on the exact specifics, but I would gamble that those imbalanced accounts are still outstanding; and my guess is they’re about to get totally monetized.

So the big question now is, where do you park money? I think that it would be very stupid to try and be short right now with central banks making big noise and seemingly readying the cannons.

If this is like past central bank action, then any longs will do – equity, commodities, debt, whatever you like. Oil could get a huge boost since it’s been so ravaged. ECB action will give the Fed room to play, especially if deflation keeps up. Yellen is no Bernanke…yet, but she also hasn’t been tried either. If the Fed coordinates, all boats get lifted.

But the safest low key play is probably just to hug U.S. dollars until things are a little more clear.

I am ~78% cash, with positions in CCJ, BAS and VOC, down roughly 3% in the first two weeks of the year.

My Worst Day In Three Years

1,815 views

Last night, following the second round of feasting, I took a minute to flip open my phone to see how the OPEC meeting went. Looking at the price of oil, I hit a sudden case of indigestion. That was when I knew how bad today would be.

And it hasn’t disappointed. My entire book is down 10% right now. I’m down almost 15% for the year. The energy & gas sectors are solely responsible for this slaughter, taking me from +25% to -15% in a quarter.

Jim Cramer wins, folks. This is brutal. But I’m going to hold fast through it.

I can’t believe that Saudi Arabia is actually waging a price war against the USA. Why the hell would they? We don’t even export, and don’t use barely any of their oil.

If I were Russia or Venezuela or an Iran puppet nation, I’d be looking at the Saudi’s with crazed, lunatic fringe conspiracies ringing in my ears. I don’t know who Saudi Arabia is trying to kill off, exactly. But the most prescient answer may just be “tomorrow’s oil and gas projects”.

The projects that are online now are set for a few years. Hedging has been erected to support them. None of my positions have seen any change in business – that’s the only thing keeping me sane and focused right now. I want to panic, but I just can’t yet.

Check out this report on oil in the Permian Basin (page 14). Average cost per barrel has declined to $55 per barrel. The $80-90 number only applies to new projects.

The average cost per barrel of the Bakken, Eagle Ford, and Permian formations together is estimated at $60 per barrel.

Business Insider posted this graphic awhile back (by Morgan Stanley) that breaks down the extraction cost per barrel (presumably as of 2013-2014, BI is notoriously horrible about leaving off critical information). You can see the first victims of the oil price decline are Arctic drilling and oil sands (read Canada).

You will also notice that North American shale is not so different from so much oil and gas production elsewhere in the world. Yes, the “average” cost of production is higher. But look at the band; it is contained inside the same maximum range as so much else of the world’s oil and gas production. After Arctic and oil sands plays get cut in half, the next round of production cuts will presumably fall fairly even handed, across the highest cost developments, globally. That hardly spells the end times of the USA fracking boom.

Here’s a supporting set of data from Business Insider, provided by Citi. This post is more interesting, because there is a second graphic that shows the cost of every international oil and gas project, by location.

All this trouble for what really isn’t even a problem in the first place. The EIA short term outlook for crude consumption vs. production shows what can hardly be called an issue – a million barrel a day surplus in historical context. The largest gains in the oil supply surplus came from the first two quarters of 2014. You can hardly call those unprecedented; we experienced a much worse supply shock back in the first half of 2012.

Also look at the historic unplanned crude shortages from the Middle Eastern countries (page 15). In the past year alone, half a million barrels a day came back online after having been unexpectedly dropped off. You can see the effect of two separate war times breaking out in Libya. Saudi Arabia is suddenly popping up. Add another country to the mix, or an expansion in lost production from one of those already on this list, and pretty quickly the million barrel global surplus is absorbed.

But the best blessing of all may just be the effects of low oil prices themselves. Globally growth has been terrible and Europe has been our poster child. But with the euro so low and cheap energy prices coming, we may just finally see old mother Europe do something…anything.

This is going to hurt very badly. I was too quick to add back to positions and far to willing to take on margin. But I’m going to stay calm, and wait to see what comes up next.

Going Higher

212 views

I don’t know if this is just a bounce or a new leg to the rally. But we’re going up, folks.

The EURUSD is back near 1.275, after bleeding below 1.27 earlier. The collapse of the euro has been the driving force of the move in oil and the correction in the markets. That’s it; the big mystery. The oil glut, the game of “guess demand whack-o-mole”, the sudden fear – nothing next to the euro.

The other excuses being provided are just not that relevant. The data is fine. Demand is shifting around and notoriously sluggish but altogether fine also. Jobs creation is slow, but fine. There’s no real data even reflecting the fears of observers on display yet.

But the euro is an undertow and its move from above 1.4 to below 1.27 did damage. It strengthened the dollar considerably and sent trade out of balance.

With the euro firming up a bit, it’s going to help take some of the edge off. For as long as the EURUSD is lifting I am constructive on stocks and commodities.

You Always Take The Blue Pill

149 views

Let’s get something out of the way.

Yes, this is all an illusion. But why should that matter?

So what that the entire structure of the market right now is fake? That without rigging the system, we would be much lower? Why should I let that get in the way?

The things I’m going to buy with all these gains are going to feel real enough.

I hate to break this to you pal, but life is an illusion. What, you were attached to this nonsense? Birth. Death. It’s all a veil of deception.

And when, long in the distance, this raindrop of a Universe we’re trapped in smacks the pavement and contorts itself into a Gödel Space and wakes the dead, this is all going to look pretty stupid. But for the moment, rather than “Zerohedging” myself into hyper-analyzing micro-variations of white noise in Fed data, I’m going to embrace the illusion.

Because the reality sucks, champ.

A Global Power Shift Is Emerging

373 views

Short term cautions not withstanding, we are on the precipice of something great.

The entire structure of the global economy is shifting, slightly and slowly. But like all great change, the most striking of the movement comes all at once, at the end.

The United States is driving this assault of the balances of power, globally, as the energy revolution progresses on our shores. This country is set to become the biggest oil producer in the world – and we are now slowly removing the export restrictions that are the last remaining barrier to this end.

This isn’t just about US trade balances and deficits. Those numbers games matter, but they always matter less than you think.

This game is about power. Oil has been the source of power to our enemies for too long. Russia and the Middle East have fed well on global consumption of this product, erecting their cartels around the flow oil to global industry. It has made them powerful and a threat.

The move by the US to become the world’s largest producer of oil and gas can be viewed through a different lens than financial gain alone: this is also going to completely upend our adversaries. What wars and weapons and diplomacy and cooperation could not possibly have accomplished, given the entrenched interests we faced, this one mighty push on our part will quickly bring about.

This is a once in a lifetime opportunity. You must get invested in it, and stay invested in it. All US leadership sees the goal, and no one objects to it. The days of getting beat about by monarchies in Saudi Arabia, needing to cut backroom deals that undermine our own morals with foreign militant groups, having to sit through endless meetings while Russian oligarchs threaten our allies with gas supply shortages…these days are coming to an end.

As the US increasingly becomes energy independent, the argument to even have relations with half these villains becomes non sequitur. We can marginalize them while circling around our true allies and real friends.

I can’t see everything that is going to come from this. Naturally US power will follow. And the North and South American continents should improve, swinging towards democracy and capitalism. Outside of that, while I think US energy independence is a good thing, I wouldn’t be surprised if war also follows. Revolutions surely, but also open war between foreign, former energy exporters who find themselves being boxed into a corner. The Saudi’s days are surely numbered, in particular.

My bet is that Russia will not change much, but they will also have to cut less lucrative deals with China to make it. So at least they will be a less powerful, less interfering Russia. Good riddance there.

Suffice to say, this is unpredictability at its best. While I think I see the theme, I do not yet hear the notes. But I’ll take my chances with it anyway. The old order of things was repulsive. I won’t be crying any tears for OPEC, or for Russia.

BAS Is Returning 7% Today Alone

153 views

Although my 40% cash position may create the illusion that I am missing out, such a view would be misplaced. Careful allocation and selection on my part is gifting me full participation in today’s excess in spite of recent reservation.

BAS is up 7.29% at the time of this writing, as the natural gas cycle makes full leaps and bounds forward. As I told you it would transpire, this is where your money must be at for the next 10 years. Companies and partnerships like BAS and HCLP will grow at unprecedented rates, facilitating the United States of America back to Her rightful status as Greatest Country and Loan Superpower on planet Earth.

HCLP is also up 2% and taken altogether, my portfolio is up .9%.

As for the excitement about Yellen, I don’t fully understand the sentiment. If you go back and read or listen to anything from Yellen, it’s pretty clear she has been consistently more in favor of Federal Reserve supporting markets and the economy than Bernanke was.

Despite that, there is good reason to believe a deep pullback may come soon enough (first half of 2014). We can’t all be millionaires.

UPDATE If you followed my initial purchase of BAS on 8/16/2012, you are presently up 65% on the position. If you’ve been trading along with me inside The PPT, you are up far more.

The Big Question Then: How To Play EU QE?

1,313 views

The Swiss bank just announced that the ceiling they have been maintaining against the euro is to be dropped. That would make sense, since the euro is now trading below 1.17, down from almost 1.40 just earlier. In terms of the exchange rate, that had to be getting very expensive.

But the timing here should be viewed as a sign that the ECB is really about to start QE. This should be the stance because if they don’t, the impact would be minimal, but if they do you can’t be on the wrong side of the trade.

In terms of what this QE will look like…well, that is the question. What is the ECB going to buy? Not public debt, surely. How much more financing can these governments stomach with yields already negative in many countries. Even the worst countries, like Greece, are borrowing at rates that an average citizen would envy.

My guess here is two fold: (1) they buy up private financial assets similar to the mortgage program the Fed had in place, but that it will center on short term bonds, while also working with banks to create a long term financing window (EU companies and banks in particular have notoriously short term financing arrangements) and (2) they take the opportunity to absorb whatever mechanisms exactly they have been using, before now, to hide the massive debt loads that should have been coming due over the past three years.

If you forgot, Europe ended up pulling some master BS, using a combination of trade accounts to gobble up the garbage so that the markets wouldn’t have to see it default. I’m hazy on the exact specifics, but I would gamble that those imbalanced accounts are still outstanding; and my guess is they’re about to get totally monetized.

So the big question now is, where do you park money? I think that it would be very stupid to try and be short right now with central banks making big noise and seemingly readying the cannons.

If this is like past central bank action, then any longs will do – equity, commodities, debt, whatever you like. Oil could get a huge boost since it’s been so ravaged. ECB action will give the Fed room to play, especially if deflation keeps up. Yellen is no Bernanke…yet, but she also hasn’t been tried either. If the Fed coordinates, all boats get lifted.

But the safest low key play is probably just to hug U.S. dollars until things are a little more clear.

I am ~78% cash, with positions in CCJ, BAS and VOC, down roughly 3% in the first two weeks of the year.

My Worst Day In Three Years

1,815 views

Last night, following the second round of feasting, I took a minute to flip open my phone to see how the OPEC meeting went. Looking at the price of oil, I hit a sudden case of indigestion. That was when I knew how bad today would be.

And it hasn’t disappointed. My entire book is down 10% right now. I’m down almost 15% for the year. The energy & gas sectors are solely responsible for this slaughter, taking me from +25% to -15% in a quarter.

Jim Cramer wins, folks. This is brutal. But I’m going to hold fast through it.

I can’t believe that Saudi Arabia is actually waging a price war against the USA. Why the hell would they? We don’t even export, and don’t use barely any of their oil.

If I were Russia or Venezuela or an Iran puppet nation, I’d be looking at the Saudi’s with crazed, lunatic fringe conspiracies ringing in my ears. I don’t know who Saudi Arabia is trying to kill off, exactly. But the most prescient answer may just be “tomorrow’s oil and gas projects”.

The projects that are online now are set for a few years. Hedging has been erected to support them. None of my positions have seen any change in business – that’s the only thing keeping me sane and focused right now. I want to panic, but I just can’t yet.

Check out this report on oil in the Permian Basin (page 14). Average cost per barrel has declined to $55 per barrel. The $80-90 number only applies to new projects.

The average cost per barrel of the Bakken, Eagle Ford, and Permian formations together is estimated at $60 per barrel.

Business Insider posted this graphic awhile back (by Morgan Stanley) that breaks down the extraction cost per barrel (presumably as of 2013-2014, BI is notoriously horrible about leaving off critical information). You can see the first victims of the oil price decline are Arctic drilling and oil sands (read Canada).

You will also notice that North American shale is not so different from so much oil and gas production elsewhere in the world. Yes, the “average” cost of production is higher. But look at the band; it is contained inside the same maximum range as so much else of the world’s oil and gas production. After Arctic and oil sands plays get cut in half, the next round of production cuts will presumably fall fairly even handed, across the highest cost developments, globally. That hardly spells the end times of the USA fracking boom.

Here’s a supporting set of data from Business Insider, provided by Citi. This post is more interesting, because there is a second graphic that shows the cost of every international oil and gas project, by location.

All this trouble for what really isn’t even a problem in the first place. The EIA short term outlook for crude consumption vs. production shows what can hardly be called an issue – a million barrel a day surplus in historical context. The largest gains in the oil supply surplus came from the first two quarters of 2014. You can hardly call those unprecedented; we experienced a much worse supply shock back in the first half of 2012.

Also look at the historic unplanned crude shortages from the Middle Eastern countries (page 15). In the past year alone, half a million barrels a day came back online after having been unexpectedly dropped off. You can see the effect of two separate war times breaking out in Libya. Saudi Arabia is suddenly popping up. Add another country to the mix, or an expansion in lost production from one of those already on this list, and pretty quickly the million barrel global surplus is absorbed.

But the best blessing of all may just be the effects of low oil prices themselves. Globally growth has been terrible and Europe has been our poster child. But with the euro so low and cheap energy prices coming, we may just finally see old mother Europe do something…anything.

This is going to hurt very badly. I was too quick to add back to positions and far to willing to take on margin. But I’m going to stay calm, and wait to see what comes up next.

Going Higher

212 views

I don’t know if this is just a bounce or a new leg to the rally. But we’re going up, folks.

The EURUSD is back near 1.275, after bleeding below 1.27 earlier. The collapse of the euro has been the driving force of the move in oil and the correction in the markets. That’s it; the big mystery. The oil glut, the game of “guess demand whack-o-mole”, the sudden fear – nothing next to the euro.

The other excuses being provided are just not that relevant. The data is fine. Demand is shifting around and notoriously sluggish but altogether fine also. Jobs creation is slow, but fine. There’s no real data even reflecting the fears of observers on display yet.

But the euro is an undertow and its move from above 1.4 to below 1.27 did damage. It strengthened the dollar considerably and sent trade out of balance.

With the euro firming up a bit, it’s going to help take some of the edge off. For as long as the EURUSD is lifting I am constructive on stocks and commodities.

You Always Take The Blue Pill

149 views

Let’s get something out of the way.

Yes, this is all an illusion. But why should that matter?

So what that the entire structure of the market right now is fake? That without rigging the system, we would be much lower? Why should I let that get in the way?

The things I’m going to buy with all these gains are going to feel real enough.

I hate to break this to you pal, but life is an illusion. What, you were attached to this nonsense? Birth. Death. It’s all a veil of deception.

And when, long in the distance, this raindrop of a Universe we’re trapped in smacks the pavement and contorts itself into a Gödel Space and wakes the dead, this is all going to look pretty stupid. But for the moment, rather than “Zerohedging” myself into hyper-analyzing micro-variations of white noise in Fed data, I’m going to embrace the illusion.

Because the reality sucks, champ.

A Global Power Shift Is Emerging

373 views

Short term cautions not withstanding, we are on the precipice of something great.

The entire structure of the global economy is shifting, slightly and slowly. But like all great change, the most striking of the movement comes all at once, at the end.

The United States is driving this assault of the balances of power, globally, as the energy revolution progresses on our shores. This country is set to become the biggest oil producer in the world – and we are now slowly removing the export restrictions that are the last remaining barrier to this end.

This isn’t just about US trade balances and deficits. Those numbers games matter, but they always matter less than you think.

This game is about power. Oil has been the source of power to our enemies for too long. Russia and the Middle East have fed well on global consumption of this product, erecting their cartels around the flow oil to global industry. It has made them powerful and a threat.

The move by the US to become the world’s largest producer of oil and gas can be viewed through a different lens than financial gain alone: this is also going to completely upend our adversaries. What wars and weapons and diplomacy and cooperation could not possibly have accomplished, given the entrenched interests we faced, this one mighty push on our part will quickly bring about.

This is a once in a lifetime opportunity. You must get invested in it, and stay invested in it. All US leadership sees the goal, and no one objects to it. The days of getting beat about by monarchies in Saudi Arabia, needing to cut backroom deals that undermine our own morals with foreign militant groups, having to sit through endless meetings while Russian oligarchs threaten our allies with gas supply shortages…these days are coming to an end.

As the US increasingly becomes energy independent, the argument to even have relations with half these villains becomes non sequitur. We can marginalize them while circling around our true allies and real friends.

I can’t see everything that is going to come from this. Naturally US power will follow. And the North and South American continents should improve, swinging towards democracy and capitalism. Outside of that, while I think US energy independence is a good thing, I wouldn’t be surprised if war also follows. Revolutions surely, but also open war between foreign, former energy exporters who find themselves being boxed into a corner. The Saudi’s days are surely numbered, in particular.

My bet is that Russia will not change much, but they will also have to cut less lucrative deals with China to make it. So at least they will be a less powerful, less interfering Russia. Good riddance there.

Suffice to say, this is unpredictability at its best. While I think I see the theme, I do not yet hear the notes. But I’ll take my chances with it anyway. The old order of things was repulsive. I won’t be crying any tears for OPEC, or for Russia.

BAS Is Returning 7% Today Alone

153 views

Although my 40% cash position may create the illusion that I am missing out, such a view would be misplaced. Careful allocation and selection on my part is gifting me full participation in today’s excess in spite of recent reservation.

BAS is up 7.29% at the time of this writing, as the natural gas cycle makes full leaps and bounds forward. As I told you it would transpire, this is where your money must be at for the next 10 years. Companies and partnerships like BAS and HCLP will grow at unprecedented rates, facilitating the United States of America back to Her rightful status as Greatest Country and Loan Superpower on planet Earth.

HCLP is also up 2% and taken altogether, my portfolio is up .9%.

As for the excitement about Yellen, I don’t fully understand the sentiment. If you go back and read or listen to anything from Yellen, it’s pretty clear she has been consistently more in favor of Federal Reserve supporting markets and the economy than Bernanke was.

Despite that, there is good reason to believe a deep pullback may come soon enough (first half of 2014). We can’t all be millionaires.

UPDATE If you followed my initial purchase of BAS on 8/16/2012, you are presently up 65% on the position. If you’ve been trading along with me inside The PPT, you are up far more.

Previous Posts by Mr. Cain Thaler
Raising Cash
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