Oil Treading Water

Another disappointing inventory report sent oil down about 1% over the past 24 hours. Despite this, the oil names are holding up okay. BAS, HCLP, and VOC were all up today, and ALDW was down if you can imagine.

We’ll see what tomorrow brings. The oil and energy patch is down from the recent top, but this is a process we are working through.

See you tomorrow.

So here we are again. Greece is back in the news, the country that was fixed to be broken to be fixed again to throw craps. Of course it was never really fixed at all, but that’s not the point here.

How is this time different? Is the EU more ready for Greece to go? Is Greece ready to actually man up and leave? Because if the answer to either of those questions is “no”, then you’re wasting my time.

If even one of those answers is “no”, somebody will get on their knees and we go right back to where we were, as if nothing ever happened at all.

Actually the more likely of those two outcomes here is the EU core finally tells Greece to take a hike (and I’m not suggesting either is about to happen at that). The EU has had more than five years to map the fallout and come up with a strategy. They also don’t exactly need a Greece so much as have one; looking for the best, least painful outcome. If you’ve ever had a bum relationship, then you know as well as I do that there comes a point when you leave that person out to dry and don’t come back.

Who is Greece going to turn to? Will they turn inwards to Greece? I’m skeptical that will yield results. Turning inward in Greece leaves them looking at a pretty lazy workforce loaded with corruption and a national culture that includes not paying taxes and almost completely shutting down on a government payroll. You’ll pardon my old fashioned free market predilections if I am inclined to mock that for what it’s worth.

So they turn outwards. To whom does Greece run?

The current fan fiction involves a Greece which runs lovingly into Putin’s open arms; a Putin who somehow isn’t almost out of foreign currency reserves from a collapsed crude oil price, has a reserve of nation building experience at his disposal, and isn’t laden with a secret foreign war in one of the last nations that decided to trust Russian power.

Greece would probably run to Russia if they got punted out of the EU, but I fail to see how that would improve things, or hold up for very long once the mushy promises at the onset started to drop unfulfilled. It would be a short lived affair.

And Greece has to know that, somewhere. People were terrified of Syriza (maybe myself included, I don’t remember). What have they done, besides cave in to every German demand? Germany keeps winning these fights because Greece has no bargaining chips. Which kind of stops making them fights.

So gun to my head, no one will even be mentioning this in three months. Black swans do happen so maybe I’m smoked. But we’ve been here three times now, and I’ll be damned if I get worked up for number four, so pull the trigger already.

The Fed are “unlikely to hike rates in June”, according to the people who’s sole decision it is to hike rates in June.

Is it supposed to make me comfortable that people with absolute discretion to make a decision talk about themselves from a probabilistic, 3rd party frame of reference? If I walked around these halls muttering “Cain is unlikely to stab someone today”, I imagine I would get admitted.

We’re at the point where we talk about rate hikes because that’s what we’re supposed to do. That’s professional of us, to pretend like we earnestly believe that rates are at any point in the foreseeable future set to rise. It’s professional courtesy, you see.

What’s not professional (and maybe just rude) is to state the obvious; rates aren’t going higher and the Federal Reserve isn’t in control of the ball anymore. It’s not just that they won’t raise rates. They cannot raise them.

Not being able to do something so simple as raise interest rates from the lowest they have ever been is disconcerting. It’s not comfortable to admit.

So a few times a year we get together and in very serious voices hold loud talks concerning whether the big rate hike is imminent. But that day isn’t coming anytime soon and deep down, each of us knows that.

And if, it should perchance, that a major correction should hit us in this state of affairs, all confidence in the Federal Reserve would be completely broken, they would become the butt of jokes, and major change would rip through the system.

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.

Hello all and good morning. Welcome to the 9th floor, where Cain Hammond Thaler has returned for a few hours in this dreary rainy afternoon to work through some paperwork, before gathering his coat and hat and heading out the door again.

The big news for the 9th Floor out last week was earnings out of HCLP and ALDW.

HCLP took a hit on news that they offered some concessions to customers, who are all hurting from low oil prices and desperate to get their operating costs down. It’s unclear what the value of those concessions are to me, at this point, but the trade off here is that for momentary pricing concession, HCLP got customers to lock into greater volumes and contract durations. Provided those customers survive (and HCLP is obviously betting that they will), HCLP is sitting on a pretty payoff down the line.

Outside of that, HCLP also entered into a partnership to develop an energy rail hub in the Permian and DJ basins. Does this sound like a company prepared for US fracking to dry up? HCLP is betting directly that we’ll be back to good times in the US oil market by the second half of this year.

ALDW announced a solid earnings beat, with earnings per share rising to $0.39 per share, up from just $0.01 per share from the same quarter in 2014. Income available to shareholders rose to $0.30 per share, up from $0.06 year over year.

ALDW is benefitting greatly from the lower WTI prices. This company is the hedge to my positioning, should I prove dreadfully wrong. If oil prices keep spiraling lower, ALDW should help keep my head above water as their operations outpace from cheap input costs.

The beauty about ALDW is that yes they are doing great because WTI prices are way down, but when I looked through their books I liked them so much I would have bought them even if it wasn’t.

That’s all for now friends. I shall see you later this week (turns the light off).

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.