Banks Tied to Oil

This is not a revolutionary idea, to observe regional banks that may have significant loan exposure to the oil and gas field. Using very simple search methods in Exodus, I isolated some banks with big short positions that have been underperforming this year–as well as banks domiciled in oil rich regions of the country.

Here’s what I came up with

When oil goes to $10, will you buy it? Or, because the world will be a smoldering cauldron of impoverished pestilence, will you wait for lower prices? If I told you last year that oil would troll down to $26, you’d tell me to get the fuck out of here and to play with a box of jumping jacks in the middle of a train yard. Prevailing wisdom suggested it’d go back up–thanks to recency bias. You’ve been programmed to believe crude is supposed to be expensive–but history says otherwise.

Oil always traded below $30 and only spiked after we attacked the shit out of Saddam Hussein, in order to seize his nuclear warheads and give away his mustard gas to Syria.

Cramer discussed oil this evening and schooled you rock-heads about the great oil collapse of 1986, a year that will go down as the single greatest year in the history of mankind–a year in which the NY Mets humiliated the Boston Redsox and won the World Series.

Cramer posits, oil can go to $10–because people are fucking morons and don’t realize $10 in 1986 dollars is $22 today.

You’re all doomed.

Breadth closed in the low 60% range. If it weren’t for oil stocks up more than 7%, we would have rolled over today. Banks got smashed, namely TCBI, IBOC, FITB and a myriad of regional banks. To me, it looks like short sellers are starting to target banks who might have exposure to oil and gas loans. NO ONE WAS TALKING ABOUT THIS up until now.

Total exposure is upwards of $900 billion. You heard it here first and will continue to hear it from me.

I sold out of 1/6th of my SPY position this morning and have a schedule of sales lined up from now until 2/2–all detailed in the Exodus blog. If you haven’t signed up yet, take advantage of the fact that Jeff Macke is guest hosting it for the entire month of January and have a look at my drastically different investment philosophy, which is based solely around the predictive algos produced by the system.

In summary: today was a suckers rally and was not the bottom. Sell the rips. Reduce your exposure. Get long gov’t bonds. Brace for impact.

Harvard Professor and Davos hot-shot believes there is a risk of a great depreciation of the Chinese currency. As the government tries to liberalize their economy–persons of extraordinary pessimism– aka the chinese people, will venture the hell out of China into calmer waters.

This is having a debilitating effect on the Chinese economy, which is rippling throughout the global economy–pushing commodities lower. This is the 3rd leg of a sequence of crises since 2008.

Fucked. In the streets.

Legendary investor George Soros is short U.S. stocks, emerging market currencies against the dollar and long U.S. gov’t bonds. He believes 2016 is a year destined for deflation, one that pressures stocks and causes the Fed to reverse its dastardly rate hike mistake and cut interest rates back to zero.

Some highlights:

The U.S. economy is slowing down because of deflation.

It became apparent after oil dropped and households saved the savings because they felt prices would drop.

The Fed rate hike was a mistake.

QE works; but has a diminishing return.

He sounds pretty sharp for a 200 year old.

Long TLT.

The NASDAQ has given up all of its gains and gone negative for the session. This is the very worst case scenario for stocks, one that is sure to spill over into tomorrow’s opening trade.

I’ve been talking about the bad breadth since this morning. Right now, it’s abysmal at 65%.

If you want the market to rally, you’re gonna need breadth upwards of 80%, with crude oil participation.

The downward pressure is the result of margin call liquidations not being met with natural buyers. Institutions and hedge funds most likely entered 2016 with a full slate of investments and little cash. Considering the fact that 25% of stocks are down 20% or more for the year, I’m guessing overexposed managers will use rallies like this to reduce exposure. This rally won’t stick unless managers grow a set of balls.

If the NASDAQ regains its swagger by the day’s end, I will consider this day to be a fine exhibition in resiliency.

Fear can turn into greed overnight, as is the case with crude today. Both. WTI and Brent are skybound, unhinged from the shackles that constrained it yesterday.

Aside from the Fed, the most important aspect to this market is crude. Cramer seems to have fits over this correlation with the market. He believes stocks should trade up with lower crude: utter horseshit. We’ve seen over the past year there isn’t any ancillary benefits from cheaper crude. People aren’t eating out more or buying more crap from the mall. They are, however, playing more lotto.

Here we are, rip roaring higher today. Very encouraging. There are big buyers for $40 crude contracts, as people are trying to grab delta before the price gets rolling and the options explode in price.

This week has seen a flurry of buying of derivatives that give their holder the right to sell at $30 a barrel as far out as December, suggesting that traders and investors are growing increasingly gloomy about the prospects of price recovery.
But outstripping the increase in holdings of $30 so-called “put” options, is the rise in buy, or “call” options at $40 a barrel, which would suggest that traders believe that by December this year, oil at $40 will look like a bargain.

Data from the InterContinental Exchange (ICE) shows holdings of $40 call options for December this year leapt overnight to the equivalent of 27.92 million barrels of oil, making it the second-largest strike for options maturing that month.

The rout that has stripped 30 percent off the price of oil in the last 13 trading days alone has sent equity markets into a tailspin and gave rise to the now-famous “sell (mostly) everything” note by UK investment bank RBS last week.

“With the current volatility, trying to catch a bottom in crude oil on prompt futures has more than a $3 a barrel risk and a contango roll depreciation, but with Brent December 2016 falling below $35, the cost of buying a Brent December 16 $40.00 call has fallen down to $3.60 a barrel,” Olivier Jakob, an analyst a Swiss-based consultant Petromatrix said.

“The Brent December 2017 $50.00 call is at $4.00 a barrel. Given the apparent signs of production stress at the current price levels we see the value in holding the longer-dated call options in crude oil at relatively low strike levels,” he added.

Reflecting Petromatrix’s point, open interest in December calls at $40 now outstrips that of March puts at $30 by a ratio of nearly three to one, based on the ICE data.

Over the last week, open interest in $30 puts in fact fallen by about 20 percent, while in those December $40 calls, it has grown sixfold.

“It’s been the trend of every melt down to buy upside calls before they get too expensive to get some delta when the market turns,” one said.

Market breadth is still in the mid 70’s, not too impressive. However, the rally in crude is very impressive. My money is on a gorilla raping rally through next week.

The market needs to hold these gains, else margin calls will crush any hope by the end of day. The rally in crude, albeit tepid, is encouraging. However, I wouldn’t be surprised to see oil lower and stocks higher, decoupling from the commodity.

Bearishness is at record highs and we all have reasons to sell our stocks. For the year, I am down about 5%, fully invested in SPY and TLT. I did sell 1/6th of my SPY position this morning and I detailed my plans inside Exodus for members to take in.

News is meaningless right now. All the matters are animal spirits. Do investors want it or will they cower into the afternoon trading hours again?

Breadth is only at 73%, so that’s not encouraging. But we are so oversold, people are so desperate for a rally, I’d be surprised if the muppet masters didn’t throw everything but the kitchen sink at this market–trying to light a fire under this market.

Longer term, banks, tech and energy are impaired, all for different reasons. Take the rally and use it to reduce your exposure.

Jeff Gundlach aka ‘the new Bill Gross’ is giving it to the Fed for prematurely hiking rates, as he was one of their most vocal critiques. He suggested the recent sell off as having the trappings of liquidation or margin call selling and then pointed to oil as a result of a ZIRP policy gone awry, coupled with global weakness.

Oil is in massive oversupply due to ZIRP (zero interest-rate policy) induced over-investment,” he said. “And crashing oil is not the cause of all this chaos, it is a symptom of global economic weakness. As are all the tumbling risk markets. We have insufficient and dwindling global growth.”

Gundlach, who had repeatedly warned that the Fed prematurely raised rates in December, said: “The market is going to humiliate the Fed.”

Gundlach said Fed officials need to soften their rhetoric on hiking rates further. He said he does not think the Fed will be able to raise interest rates eight times over the next two years, as reflected in its ‘dot plot.’

For those unfamiliar with the inane ‘dot plot’: it is a psychotic plan by Janet Yellen, probably conjured up in a NYC deli, where the Fed would hike interest rates 16 times over the next 3 years. Really, it’s clownishly funny, especially when considering how the market faired with just 1 hike.

The BOJ threw a wet towel on future stimulus tonight. As such, asian markets reversed early gains and fucking plunged through the bamboo floorboards.

Risk, for lack of a better word, is off. Japanese stocks are vacillating between egregious and mammoth losses, anywhere from 2-3%. Hong Kong is down 250 points, now below their “NAV”. The last time it was breached was during the Asian contagion crisis of 1998.

U.S. futures have reversed earlier gains of +130 and are now lower by 50.