Friday, January 29, 2016

Could oil have finally found its floor?

Well rumors are that Saudi Arabia has suggested that every producer cut production by 5% -- again this is a rumor and nothing may come of it during OPEC's next meet & greet.  Again agreements can be made and they can be broken. On top of everything Iran is back in the oil game, for real, and things there are getting interesting. Gartman -- a loathsome analyst said that we will not see oil at $40 "in his lifetime"  -- well that could be long as it could be short, but again aside from some free publicity I don't see how Gartman can make that call.  18 months ago oil was at $110.  Who would have called oil at $30 then?

Europe keeps on being fun, as is Japan with "no negative interest rates ever" -- at least until this morning.  Banks in Europe keep outperforming (NOT) the sad truth is that Europe is in a slump and the first to be affected are financial institutions.  Looking at charts none of Europe's major bank have reclaimed their market cap of 2007, and the Italians are not doing well at all.  

The bond market has decided that things are tough and pricing has suddenly gone up (despite stocks going higher).  My gut feeling is that the market is primed for QE (insert number here) after the Feds have finally realized that growth in Q4/15 was 2.5%, 1.7%, 1.0% 0.7%; somewhat below their Q4/15 estimates.  Maybe the Feds are now focusing on Q1/16, but it remains that a lot of indicators are negative -- the worse is employment that seems to be slipping and has in the past been a fare barometer of economic heath.

US banks have to be hoping that the oil sector recovers -- America is now a net producer and as such is looking for higher prices.  The banks have lots of loan exposure to the E&P sector and that could be an issue going forward.  Its not a "housing market size" problem but its an issue.  Agains stories of Chapter 11 are running across the market -- some look like BS while other may be real as the borrowers are nearing price levels where even variable costs are no longer covered.

My instinct is that oil prices, if not done, are near their lows.  Unless things in China get worse and America joins Europe in a recession.  Already states such as Texas and Oklahoma are reeling from the drop in oil prices.

Monday, January 25, 2016

Fight: Bulls Vs. Bears

What a strange few weeks it has been.  Oil prices fell all the way down to $28, just to rebound a few days later to $32 -- as of 10 minutes ago they are just north of $30.  The stock market is in crisis -- we seem to be having a major correction, although its not entirely clear that its a major correction (it could just be a garden variety version -- after all the US economy is NOT in recession).  Some segment of the economy are in trouble, this morning all the talks were that another shale oil producer was about to "give up the gost".  Granted in America we are not talking about liquidation we are talking Chapter 11 with a write off of debt and equity -- new owners will keep on pumping.  The world is awash with oil, Chine diesel consumption is growing slowly, Saudi Arabia's bet that they can get the world to stop producing --- seems to be hurting them most.  The impact of a transfer of wealth from the producer to the consumer is the great unknown as for economic impact.  On thing for sure is that low oil prices are devastating for the alternative sector.

The GOP talks about "depression" caused by Obama, and they talk is that things in Texas are dire, although it cannot be worse than what we are seeing in Alberta -- Canada's money machine has been shut down.  Again the impact is about to get interesting.  

My experience is that the Feds will not do anything to influence the outcome of the election.  Should a recession occur in 2016 (its possible -- but has not really happened yet) it could impact the outcome of the election -- imagine President Trump... Economics trumps all other issues and the market is wondering where things will be this time next month.  Apparently oil options are trading at $25 -- don't know how much faith I would put into that, still it could just be out of the money protection.  Canada's economy (about 35% which is ressource based) is suffering from low energy prices and the precipitous drop in commodities -- the fall of the CAD has helped the economy (although food inflation has beens steep (around 15% in the past 3 months) a reflection of the massive imports of good from our Southern neighbors, it remains that part of Canada's economy are near depression levels (I'm talking about you Alberta).  The fight about oil pipelines via eastern Canada has gotten nasty -- don't entirely know why the failure of the BC pipeline didn't cause as much resentment.

Anyway, the CAD is on a one way slide, just 5 years ago the CAD was trading at 0.9 to the USD. Now we are looking at 1.39 and the slide appears to continue.  

My rambling about economics also needs to include Europe; the banking sector is hurting, DB had some rather horrible results and I already indicated that the Italian banking sector was in real trouble. So the markets are skittish, which is understandable.  After year of slow rise in the stock market and negligible volatility, vol is back with a vengeance -- which should make hedge funds happy places (maybe).  Where the markets will go, no one knows.  Bob Janjuah a guy I really respect (and an old friend) is convinced that the big correction is upon us!  maybe, but the North American fundamentals are just not there.

Wednesday, January 20, 2016

Oil Prices -- Where is the floor?

If I knew I would be a rich man!  One thing for sure is that there's still lots of long position out there. Every Tom, Dick and Harry saw the "easy trade" of going long oil because the forward curve was steep -- a cannot lose trade, that is losing lots of money for a lot of people.

Where will it end?  A very good question, demand is simply not rising -- Europe, which is a net importer of all energy things should be rejoicing, but in fact things are getting serious there.  Greece remains a basket case -- and the yields have recently started rising again.  The European banking sector seems to be facing a very difficult times and the word on Italian banks is "Get Out Now".  It never made sense that Italian debt was priced inside that of the US.

Europe is in a difficult place, deflation (especially imported from China) is a problem, the Southern countries problems that were swept under the rug are coming back to the foreground and Germany's mind is elsewhere -- the refugee problem is becoming a serious social problem.  From the mayor of Cologne that told that women who were attacked only had themselves to blame to other attacks from migrants that were hidden by the police across the country (clearly this was a political decision), Germany's leaders are otherwise busy -- and will have a hard time spending political capital on the economic problems of the south.

None of this is good, the smart money seems to be on the sideline -- why take a chance when the markets are so very unnerved.  The US high yield market is poised to take a major hit -- maybe not in the oil and gas sector -- because prices have moved too much, but in other asset classes.  In a crisis you don't sell what you want, you sell what you can.

In the US the prime buyer of stocks -- corporations have stopped the buy back cycle -- the debt is simple not that cheap anymore (and harder to sell).  So US stock prices are in a down cycle (maybe).

Things are getting interesting -- could we be in for a major correction

Monday, January 18, 2016

Energy loans are now causing systemic risks to US banks

"The Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated 'under the table' that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches."
Zero Hedge, January 18,2015
That's more like it!  There is no doubt that the US bank's exposure to the drilling sector was large. Ideally, for the banks was to issue bonds (Junk, but they like to call them High Yield...) that was the feed for the US energy sector over the past 5 years.  Almost any project was fundable, because extraction costs were around $50/$60 and prices were around $80/$90.  As of 9:00 am today oil prices (WTI) are trading around $29.95, so that producers are maximising output so as to pay variable costs.  However, banks still "normally" would show loan impairment.  Covenants are breached and the prudent thing is to take loan loss provisions, that would reflect in a mark to market of the loans -- now it appears that there is, like in 2008, an agreement to "suspend" this mark to market rule, so as to not impact Tier one capital.

Now, that's a worrying development.  The implication is that banks have sufficiently large exposure to the E&P sector, which is clearly distressed, so as to have Tier one implication for the banks. Shows that the regulator took the line and the sinker, when it agreed to banks excessive exposure to that sector.  Compare this to Canada, where the Oil Sands business is far more affected, but where the banks are only discussing minor impairment in the Western portfolio.

The US is not in a recession, granted growth is not as robust as it could be, but it is still positive.  Yet the banks are forced to take action on their mark to market rules as to avoid impairment.  This indicate that the banks were, once again, imprudent in their lending activities... I saw the big short a few nights ago, nice story, but it shows that the banks have learned once lesson very well, privatize the profits and socialize the losses -- the American tax payer is a sucker, and should be exploited.

Friday, January 15, 2016

Baltic Dry Index -- what it is and what it does

Historically, the BDI has been one of the best measure of global trade growth or contraction.  Its an index with few problem because if the number of ships increases then the index may fall despite trade growing -- which is what happened in in the early 00.

The BDI is a measure of bulk shipping -- we are talking steel, minerals and other bulky items that are not moved by containers.  The BDI peaked at 10,000 in 2007 but also fell to near 600 in 2008 -- a function of the economic crisis -- Now for many economists, like myself it was a useful tool to ascertain economic health of economies, such as that of Canada, which are primarily dependent on the export or raw material.

In the 2008 crisis it lost a bit of its usefulness, for not only was there a economic crisis but there was also a known schedule vessel replacement cycle.   The bulk carriers have an expected lifespan of about 20 years, and the replacement cycle in 2008 coincided with the economic crisis -- making the index drop to an un precedent 666 level.  

While the US treasury has been tightening, for the first time in six years, the global trading economy has gone to the dogs.  Clearly there is now oversupply in the oil and gas sector, but that could be more a function if supply rather than demand.  What the BDI shows is that trade demands are at an all time low.  The BDI crashed to 400 over the last few days.  So the oil at $30/bbl is not only a function of a rise in supply, but also a function of a "fall" in demand.

BTW I've received a number of enquiries about a simple trade:  Buy 200,000 bbl of light sweet WTI oil today at $31.14/bbl and sell them forward with a delivery in two years --- the price is around $42/bbl.  Sounds like like an easy $10/bbl which would translate into a $2 million gross windfall.  Except for a few problems; credit, getting a vessel and keeping the oil in condition.  Oil left to its own device will naturally fractionates, so the vessel has to be able to "stire" the product.  Then there are the cost of storing... anyway, maybe a good trade but you need about $7 MM to make it work, for a gross revenues of $8.4 MM  which is a 9.4% IRR -- not bad, but is it worth that much trouble...

Monday, January 11, 2016

The days of the car ownership are coming to an end

This morning Telsa's newest software iteration was released to all users (in the US for now) that now provides a Summons Feature (SF for short).  What is SF, well you press your key fob and the car will find you.  it will drive out of the garage, it may fill itself with electricity independently, but the car will drive to where you are.  Imagine arriving at the airport and "summoning" your car to the curb... I though this feature was years away, in fact it was weeks away.

The important thing here is that the car can move without a driver and passengers -- the taxi of the future if you will, the ultimate "shared economy".  My guess is that in very large cities -- New York, London, Mexico this will become the norm.  You are part of a club, when you need a car you summon one to pick you up...voila!

The news out of CES (Consumer Electronics Show) could not be better for Tesla -- because absolutely every car manufacturer is building an electric car out there.  This is a very big deal, because cars (and their manufacturing) represent a sizably portion of the GDP -- a shift on the use of cars (their longevity) will have an appreciable impact on GDP.

Monday, January 4, 2016

Changing Financial World Order

When I became a banker, in 1984, the financial world was well organized.  In the City of London there were clear rules as to who did what, fixed commission the easy life; then Tatcher's government decided to tip over the apple cart and implemented the Big Bang of financial reforms.  Big American brokers set up shop in the City covering the globe with their knowhow.  

In no time the old City was swept away -- the Americans with their speed and capital took over and impose their rules -- granted the American learned their share of new stuff, foreign currency were a no mans land, I was privileged to "assist" as a very very junior banker, as the first European interest rate swap was written (we didn't think we were doing something that would change the world).  It was just a contract.  The Americans could be amazingly obtruse; one back office guys in New York, decided that Sterling could not be worth more than the US dollar -- and for months booked F/X trades upside down...

Now the gasumper is being gasumped!

Last summer the Economist published a survey that showed that crowdfunding is now providing as much capital as the venture capital business.  Fintech as they are known are killing the banks, making full use of the internet they are often more nimble and have fewer of the legacy problems that large financial institutions have to take into consideration. Crowdsourcing is the first proof that things are changing.  Obviously, there will be fraud -- if money is involved they will find a way.  But already the early seeds are paying off;

  • Want to send money abroad?  
  • What to have a receivable tracker (attached to your accounting system) and a financing option?

There are Fintech for that.  For years accounting software has been available on line. but imagine allowing all your invoices (received electronically) to be auto scanned and filed and processed without human touch -- great when you have a few a day, amazing when its a few hundred. The processes are scalable, and they are killing the established players -- thank God! Over the past 25 years the financial industry has become the biggest rip-off there is, in 1984 financing activity accounted for less than 2% of GDP, today its nearly 8%.  Little value added -- considering all the fraud we have encountered (market rigging) etc.

My guess is that when the next financial crisis occurs (no I have no idea!!!) a lot of these fintech will have a wide open field as the banks retrench "non-core" activities.  Because that' how they work. They look at divisional performance take no account of changing market views and then cut!  

On a final note winter has finally arrived in Canada.  Whereas Christmas eve was a balmy 15c this morning the temperature in Montreal was -16c.  The snow has also showed up, with nearly 70cm in the past week.