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I Seem To Be Experiencing A Correction

Welcome back and how I did miss you all while I was away. My 9th floor office had that cold air of abandon wafting through it for the better part of forty-five minutes, before the warmth of the hearth drove it out.

The recent days have brought a correction in my positions, with BAS diving back below $10, HCLP testing $30, and some others also wallowing. It is hard for me to read too much into this, at the moment. The EURUSD is running back to test 1.10 and bonds are rallying again. At hand is the question of whether we are to retest the lows of the damage or will find support.

But for me this question is superficial in a sense. BAS in particular was up a great sum and so though we have corrected significantly, it’s nothing I wouldn’t expect from a distressed asset. My positions are derived from non-technical details mostly so while it’s difficult to watch this sort of thing play out, it’s not material.

The summer months are upon us now.

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Oil Markets Are Destroying Themselves

We’re still in the midst of watching the oil industry unravel in spectacular fashion. I do not feel comfortable even uttering the word “bottom”, not even in jest, for the fear the entire structure would unwind and usher in $10 oil for two decades.

We need more expensive oil. I know you do not want to hear that; why just a few weeks ago I saw a long dormant Hummer H3 roaming the tundra planes of southeast Michigan. A once formidable species, these vehicles could once be seen all across the North American continent.

Their reemergence was a startling sign. Gasoline has gotten cheap.

It is comforting to think of these lower input costs as an unchallenged blessing to America. It is more complicated than that, I am afraid.

High oil prices have been one of very few elements that has actually helped foster stability in third world countries. Watching the recent turmoil and wars, it is easy to forget just how unnaturally peaceful the most recent decades have been in the grand scheme of things. Oil money has been used to weave the social fabric in these places and if oil prices stay low for a sustained period, we are going to see much more egregious cases of foreign sovereign collapse.

Oil prices have also driven the US recovery. The shale revolution was named thusly for a reason; job growth in the US would not have been possible without the advances in shale oil. This is a major pillar of the US recovery and without it our economy is going to suffer. High input costs were a minor inconvenience that came with job growth.

And of course there is the euro. The euro may just be the cause of the oil collapse in and of itself. I cannot say for certain yet, but I am suspicious. The euro and dollar are now almost at parity and this has crippled US exporters. If our own markets are suddenly sloshing around with oil to spare, it is because we are suddenly priced out of foreign markets. This is a precarious barrier…how cheap would oil need to be in this country to enable exporters to compete against euro/dollar parity? The dollar is going to isolate our business and tank us if we let this continue.

We need to start taking steps to regain stability. Bernanke would have never let this happen. Yellen is pushing for normalization of policy and this is not a bad thing. But they are far too comfortable watching a currency move like this happen with our probably largest trade group. We need a weaker dollar and we need more expensive oil and we need it now.

Now, because oil is so cheap, struggling shale producers are clocking overtime to meet payments. This is the exact opposite of what the oil markets need to find a bottom – a glut of even more oil.

In addition to addressing currency and demand issues, we really need a JP Morgan figure to emerge and start brokering some M&A moves that stitch up the supply side. Oil markets are leaking supply uncontrollably and this is going to cause extensive damage if not treated like the dire risk that it is.

The weak hands need to be either bought out or flushed or secured with long term financing. If we can’t shut some of these wells off, we’re going to have irreparable damage on our hands.

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EURUSD Parity Is Nearly Here – A Quick Look Back

There was a time just a few years ago when it was quite fashionable to talk about the European Debt Crisis. Why, we would wake up in the morning, have a spot of tea, some toast and some eggs, then jabber on until noon of eurocrises and pending doom of “The Old World”.

Around that time, I made a prediction that the euro would trade to parity against the dollar. It wasn’t something I could really trade on, since the only available products were untrustworthy scams and the timeline was long and unpredictable.

Here’s the link to the last time I mentioned the call, back in 2012. I suspended it because the then idiot Tea Party freshmen decided to destroy the credibility of the US government and we were still in the middle of easing programs designed to destroy the US dollar.

But I warned then, the future would be full of sudden shocks where the EURUSD would be prone to collapse and near parity. Well, here we are, with the EURUSD rate just now hitting 1.07 today.

This is the key reason why our markets are so volatile right now; especially true for commodities. Oil doesn’t know up from down specifically. The balance of trade is being thrown off.

This ends with stability of currencies. We don’t need the old EURUSD range back per se. We just need the bleeding to stop so we can find a new equilibrium.

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The Big Question Then: How To Play EU QE?

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.

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My Hedges Are Failing Me

Per the course, some dipshit(s) is loading up on oil going into the teeth of the summer slowdown, keeping steady pressure on the contracts. Who exactly it is that thinks buying crude oil while inventories are undergoing surprise builds and PMI is missing expectations, I cannot say. All I know is that this is cliché.

The market is rolling over and some genius is trying to strip down my shield and use it for a wake board on a lake somewhere.

The euro is also hitting pressure around that 1.3 area. Look, Europe is inevitably at the heart of this slowdown. Their unemployment and economy issues are what is derailing China. Japan is front and center, but Europe is always lurking in the background.

If we slow down, there is zero chance that the euro can hold this strength.

On the positive side, CLP shook off analyst downgrades and lawyer harassment and rallied more today; mostly because it’s a good deal.

I don’t know what it is about the bar exam that turns people into sociopaths – I don’t want to know. The truth is, I actually hope these law firms piling on fiduciary inquiries succeed in getting MAA to pump up the offer, just to seal the deal. But when it’s all said and done, the lawyers pushing this harassment of CLP’s management should seek professional help.

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What A Lovely Monday Slaughter

I apologize for not piping in on the sell off. I was driving down from northern Michigan and only had the intense joy of watching “Revenge of Silvio Berlusconi” on Twitter, as opposed to the full blown Blue Ray.

My cash position only stands just north of 10%. Not even a few days ago it was almost 30%. Thus I have egg all over my face.

But I have hope. Hope for higher prices. This winter was so excellent, it’s difficult for me to believe I could possibly walk away down from the amount I’ve made. So I have some breathing room. Also, I have EUO as a hedge; and that is just running here.

Thus I will be watching closely what happens.

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