Hugh Hendry, the eloquent, brash, and outspoken CIO at UK-based Eclectica Asset Management, comments on the today’s worsening selloff in markets, appearing this morning on CNBC European Squawk Box with Geoff Cutmore.
click on image for video
“It feels like the blackest morning,” Hugh Hendry, CIO & partner at Eclectica said Friday (today). “We’ve never really experienced a matter as grave as this.”
Conditions like these are unmatched, except with 1930-32. He “slakes” regulators for this, making the following points.
So far in the month of October, Hendry’s hedge fund is up 40% on account of his levered positions in long-term government bonds.
Tags: Euro, Hugh Hendry, Markets, Short Selling, Trading, UK, Video
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Its pretty clear that the last thing on investors minds these days is inflation when the 10-year yields around the world are back at last year’s lows. Falling long rates are a fairly reliable signal of deflation, and given how commodities, both hard and soft, as well as housing prices in the G7, investors have been making the flight to safety for most of this year.
10-year government debt securities have been among the best performing investments anywhere in the developed world.
Tags: Australia, Commodities, inflation, interest rates, Japan
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By the time the Treasury makes its first investment in the Financial sector $700-billion may be enough to buy the entire sector. Take a look at the chart below. As of today, $700-billion buys you 55% of ownership of all financials.
Chart: Bespoke Investment Group
Tags: Chart, Dollar, Financials
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Hilarious! Some misplaced humour in these crazy markets.
Click on the image below to visit http://sadguysontradingfloors.tumblr.com.
Tags: humour, Markets, Trading
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What did he expect?
Tags: Euro, Markets
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From Jim Cramer in New York magazine:
What will New York look like a year from now? The answer: bad and probably worse, and perhaps downright catastrophic. Three degrees of awful. The first step was passing the bank-bailout legislation. Now that it’s done—and if it didn’t get done we would have been looking at a guaranteed economic collapse—the critical issue will be presidential leadership. And while any president will be an improvement over the current one, there is a growing belief on Wall Street that Barack Obama has the capacity to lead us out of this wilderness while John McCain does not. I’ll go a step further: Obama is a recession. McCain is a depression…
At this time next year, I could see the Dow as low as 8,300. That’s more than 40 percent off its October 2007 high of 14,164. On Main Street, that means a further slowdown in consumer spending, as buyers feel poorer, and another hit for 401(k) and college savings accounts. For Wall Street, it means more bank closures and mergers and still more layoffs. The two remaining independent commercial banks–née–investment banks, Goldman Sachs (GS) and Morgan Stanley (MS), will have to fight mightily to remain independent. The bet here is that Goldman makes it but Morgan Stanley succumbs to one of the four emerging megabanks — Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Wells Fargo (WFC)…
In terms of investing between now and next fall, I’d buy the stocks of only companies you can’t not use—Kellogg’s (K), General Mills (GIS), Kraft (KFT), P&G (PG). You can’t trust anything to do with financial paper — there’s still too much uncertainty (if a bailout bill does pass, at what price will the toxic bonds be marked?). And commodities have been bid up too high — demand soared as investors sought shelter from stocks — to buy for some time. Oil’s going to $50 on weaker demand; when it gets there, we can revisit the oil stocks.
Tags: Banks, Citigroup, Commodities, energy, Gold, oil stocks, Recession
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This ugly looking chart of the S&P 500 serves on one hand as a grim reminder of how much rebound it will take to get back to the market’s previous highs, and on the other hand, how much opportunity there is ultimately in the long term for those investors who have the fortitude to build positions at these levels. It may be a good historic time to start gradually wading back in. Go slowly, as this moment in the market/time continuum may become more historic.
When you’re down peak to trough -37.6% it takes 60%+ to get back to even at the market’s previous highs.
Chart: Bespoke Investment Group
Tags: Chart, S&P 500
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Key Central Banks around the globe have announced a concerted cutting of interest rates, by 0.50%, this morning, in an historic moment of cooperation, to stem the tide of the global credit market’s woes.
The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden, and the United Arab Emirates have all cut key lending rates by 50 bps or 0.5 percent.
The Bank of England also announced that it would partially nationalize the country’s banking system by investing $90-billion in some of its banks.
In China, the People’s Bank has cut its key rate by a commensurate 27 basis points, and the Bank of Japan whose key rate is only 0.5% did not cut, but is lending “strong support” to the other central banks’ moves.
In identical statements, the Fed, ECB, and Bank of England, explained that inflationary concerns have moderated, and the worsening financial crisis had “augmented the downside risks to growth.”
Trichet, the ECB’s Chair, very modestly stated that “inflation is moderating.” Critics have argued that the ECB has been too slow and looking in the rear view mirror too long, to do anything meaningful for the European economy, and at the expense of the financial stability of European businesses. Others argued that while the move is very welcome, it may be too little, too late.
Euro and Sterling both gained on the announcement, while the price of gold fell.
Equity markets in Europe rebounded from intraday lows on the hope that this monetary action would help banks and consumer stocks.
Pre-Opening trading in index futures indicate a strong opening for US markets following the announcements.
Key Rates (post-cut)
Tags: Banks, Canada, China, Credit, Credit Market, ECB, Economy, Euro, Fed, Federal Reserve, Gold, inflation, interest rates, Japan, Markets, Sweden, Trading, UK
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Ongoing credit market turmoil and a rapidly deteriorating economic outlook have hit global equities very hard.
Ongoing credit crunch worries and evidence of resultant effects on the global economy are diminishing the remnants of confidence among investors. Investors are fleeing all risk assets indiscriminately, moving into safe havens such as cash and government securities. Widening concerns of global bank failures continue (regardless of last week’s approval of the U.S. TARP program, now anti-climactic), bringing about runs on banks in several countries and preventing financial institutions from lending to one another.
Germany and Denmark announced guarantees on all private deposits following Ireland’s first-mover decision last week. Looks like we’ll have to wait for Europe to come to some unified solution such as a concerted bailout, and some nationalization of the banking sector in some of the larger markets.
Source: BCA Research, October 7, 2008
Tags: Banks, Credit, Credit Crisis, Credit Market, Economy, energy, Euro, Germany, Markets
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Jeff deGraaf, Head of Technical Analysis at ISI, who appeared on CNBC’s On The Money today, suggests that we are merely in the 5th inning of this bear market, or about 250 days into a typical 600-day bear market downturn. Usually, the first part of the bear market consists of the unwind from the previous boom cycle. He suggests that we still have yet to see the second part of the downturn.
click image to watch video
deGraaf made the point that if you’re a long-term position oriented investor, this is probably [only]the 5th inning of the bear market. If you’re a short term tactical investor, there’s been enough things washed out that you could get 150-200 “handle” rally.
The burning question that remains to be answered is, “How much like other bear market patterns in the last 40 years is this one?”
Here are the charts deGraaf discussed:
At this stage, 57% of S&P 500 stocks have now made 52-week lows.
Based on the 1973-1974 bear market deGraaf points out where we are in terms of the timeline.
Then, he makes a comparison to the 2001-2002 bear market, again pointing out where we are in terms of that one.
“What you need from our standpoint to tactically be a bull is for the market to send you a message that it wants to go up,” said deGraaf.
Here are some things to look for:
Following deGraaf’s comments, John Najarian pointed out that the CBOE VIX (Volatility Index) is signalling a great likelihood of a great number of 35 point plus days (down 60 pts. today) on the S&P 500 and more 500+ point days in the Dow, to the upside (or downside). Currently the VIX index has reached an all time highs in the mid 50% range.
The relative strength of the US dollar is promising too, but getting to a stronger dollar on the basis of the weakening Euro in the midst of the vaporization of some large European banks, like Fortis, will be painful, to say the least, as resultant losses are forcing more liquidations in equity markets during the last few wildly volatile trading sessions.
Is the bottom in yet? Not likely, and not for some time yet.
Tags: Banks, Chart, Dollar, Euro, Markets, S&P 500, S&P500, Technical Analysis, Trading, US Dollar, Video
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As pointed out by one of our favourite commentators, Hugh Hendry, CIO, Eclectica Asset Management, Ireland’s plans to guarantee all bank deposits could have a destructive impact on the value of the Euro. |Take a look at the chart. At the time of this posting the Euro has dropped against the USD from $1.41 to $1.38. Despite the fact that EU central banker, Trichet, has opted to leave rates alone, the market appears to be paying attention to the toll that Ireland’s guarantees may have on the Euro if they are allowed to go forward with this.
Relative to this development that has arisen out of the widening of spreads and the tightening of credit in the UK and Europe (as well), the US dollar is enjoying the illusion of being stronger. Given the differences in monetary policymaking, it appears that in the near term, the strength of currencies will depend on the winning moves of some policymakers and the losing moves of others.
In this vein, it appears the Fed and the Treasury are making the winning moves. It remains to be seen what the EU will do. Take a look at the Daily and 3-day charts of EUR vs USD.
Tags: Chart, Credit, Dollar, Euro, Fed, Hugh Hendry, Monetary Policy, spreads, UK, US Dollar, usd, Value
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Below is InTrade’s prediction chart showing the odds that Congress will pass into law the government bailout on or before October 31, 2008. As of the posting of this story the odds are roughly 91% in favour of passage. The question remains, in what form?
US Congress to approve a government bailout of banks on/before 31 Oct 2008
Tags: Banks, Chart
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The two safest positions in this market are Cash and Fetal.
From Tom Friedman’s column, October 1, 2008
From Tom Friedman’s column in NYT: I was channel surfing on Monday, following the stock market’s nearly 800-point collapse, when a commentator on CNBC caught my attention. He was being asked to give advice to viewers as to what were the best positions to be in to ride out the market storm. Without missing a beat, he answered: “Cash and fetal.”
Source: CNBC, October 2, 2008
Source: NYTimes.com, Tom Friedman
Tags: Video
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Click image to view video
We are huge fans of Hugh Hendry, the outspoken and brash CIO of UK based UK-based Eclectica Asset Management. In today’s episode of European Squawk Box, Hendry discusses how Ireland’s guarantee of all deposits, which are two times Ireland’s GDP will destroy the Euro, if it is allowed to go ahead.
He goes on to make the point that the market is pricing McDonald’s (MCD) as a lower default risk than Ireland or UK government debt, as witnessed by the huge spike that has occurred in the Ireland 5 year Senior CDS spread, an amazing development.
Hendry has been one of the most candid and accurate commentators on the severity of the risks that have gripped the markets during the last year.
This is yet another highly relevant interview and point of view to absorb, as it presents the view of global credit from the other side of the Atlantic. A must see interview!
Tags: CDS, Credit, Euro, Hugh Hendry, Markets, UK, Video
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As of today, credit spreads on High Yield bonds have attained new heights, those not seen since October 2002, when they reached 1120 basis points. The spread between corporate high yield debt versus their comparable treasury yields reached 1124 bps as of yesterday, and is likely to go higher as a result of today’s market activity. This signals an enormous amount of worry in the market caused by the “Bailout Election Race” that has sidelined the Presidential race.
Credit is getting very tight, and far more expensive.
Chart: Bespoke
Data: Merrill Lynch
Tags: high yield, spreads
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Perhaps the biggest problem with the credit market debacle is that Main Street doesn’t get it. Literally. Try explaining the credit market to the average guy.
The “TARP bailout” is being billed as a Main Street rescue, by Henry Paulson, et al. If you look at the situation realistically, Wall Street has already fallen. If you were Rip Van Winkle and you fell asleep for a year, while the US government tried to bailout Wall Street, you’d be wondering, what happened to all the banks that disappeared, or were bought up as of September 26, 2008. What was the point?
Add to this now Wachovia (now Citigroup), and the $700-billion TARP bill itself, as of September 29, 2008.
While Congress was voting against the credit market bailout yesterday, the market panicked and gave up $1.3-trillion.
Ironically, the folks who make the laws in America are not Wall Streeters, and are having the same difficulty as Main Streeters in understanding how the credit market works. How can you expect US Congressmen to vote on something they do not understand?
What is a credit default swap? Alt-A Securities? The Discount Window?
The failure appears to be an inability to “sell” Main Street on this bailout deal. The average guy doesn’t get “Wall Street,” and is wondering why they are going to get stuck with the bills that this bailout will generate.
What happens when you can’t refinance your mortgage, when you can’t withdraw cash from an ATM, when your employer can’t pay your salary, or the buyer of your home can’t secure financing, or your business is unable to extend credit to customers, or get credit from suppliers?
Wall Street, Ben Bernanke, and Henry Paulson are going to have to a better job to get an agreement on a “rescue package” to lawmakers, that the lawmakers can understand and pass on. Main Street still doesn’t get why it has to pay for the mistakes of others, and they don’t get yet how close the credit system is to imploding.
For now it appears that Congress has rescued voters. From what, though?
Tags: Banks, Bernanke, Citigroup, Credit, Credit Market, Mortgage, Paulson
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Not likely, according to PIMCO’s Bill Gross. In his most recent Investment Outlook, Gross, reasons and opposes (for now) the idea that in the very different worlds of Louis Rukeyser, Jim Cramer, and Jim Grant, “There’s always a bull market somewhere!”
While he does agree that there are always stocks, bonds, and currencies that can be found to be going up, while markets are going down, Gross cautions:
So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but NOT NOW, because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
- Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
- Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
- The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
Essentially, Gross’ thesis is that as the GSEs, banks, investment banks and global hedge funds delever their balance sheets, they also lower the prices of all securities that can be arbitraged within the marketplace.
The 10% year over year decline in prices has not been witnessed since the great depression, and that is a red flag.
a 10% aggregate asset price decline does more than make us all 10% less wealthy. Because many of these assets are leveraged and margined, the more they decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows. It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.
This rare event of systematic debt liquidation is the central issue in both the US and globally. If central bankers are unable to take effective measures, the campfire could turn into a forest fire, and a mild asset bear market could turn into a destructive financial tsunami. Gross points out that even they and their SWF and central bank counterparts who have been doing their part to stem the tide, and in some cases bought into debt issues too early, only to see those issues now priced “underwater,” are now reluctant to make additional commitments.
Paulson and Bernanke have consulted PIMCO regularly throughout the credit market debacle, and have apparently acted on some of that advice as well as that of others like Pershing Square’s Bill Ackman, who floated a Frannie bailout plan prior to the Fed’s that was eerily similar.
Paul McCulley stated in late July, that the only thing that was viable given the delevering of the market that was well underway, was for government to lever up its balance sheet, much the way it is proposing to this week, with the $700-billion TARP plan.
common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions.
Gross concludes:
Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
(note: these ideas were published well before the Fed/Treasury realized the need for a far reaching solution)
Is there a bull market somewhere?
There is, but those assets are “rare as diamonds, as opposed to grains of sand,” according to Bill Gross.
Investment Outlook, Bill Gross, September 2008
Source: PIMCO
Tags: Banks, Bernanke, Bill Gross, Chart, Credit, Credit Market, Economy, Fed, Grain, GSE, liquidity, Markets, Paul McCulley, Paulson, PIMCO, Recession, spreads, Thesis, UK, Water
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Niels Jensen and Jan Wilhelmsen of Absolute Return Partners (www.arpllp.com) produced an informative analysis of the credit crisis and provide the following observations. Here is our summary:
Loans and Mortgages are getting much harder to come by on average, globally.
This has bold and negative implications for property prices everywhere.
Observation # 1
It all began with housing and it will end with housing.
The current overhang caused by the tightness of credit (mortgages) will take years not months to unwind and housing prices will not begin to rise again until this occurs.
Observation# 2
Don’t trust central banks to always do the right thing.
Evidence suggests that while their intent seems to be genuine, central banks around the world have not been very effective at taming inflation. For example, simply raising interest rates in the underlevered economies of the BRIC countries has been futile, since most consumers and companies do not employ credit to the extent that those of us in the west do.
In the case of the BRIC countries, it appears the problem does not consist of sustaining growth, but rather containing growth. China, for instance, has a record of under-reporting both real and nominal GDP growth, and may have only recently more accurately stated inflation owing to the fact that they could not hide from skyrocketing oil and food prices.
Observation # 3
Policy mistakes are likely to be repeated.
The US is currently at risk of making the same policy making mistakes Japan made 10-15 years ago. US residential property prices have risen more during 2000-2006 boom than did the Japanese during the late 80s boom.
Japan too, though more rapidly, reduced the cost of money dramatically to fend off its crisis.
Japan bailed out many of its institutions and used taxpayers money to fund the activity of fixing the ‘unfixable,’ and this could have profound implications for the US GDP growth in years to come.
Observation # 4
The golden era of investment banks is over.
The biggest independent investment banks have just become banks. The US investment banking business is becoming more like Canada’s where the business is dominated by the large schedule “A” chartered banks and America’s “free” market just became a little more socialist. How ironic…The folding of GS and MS into banks also has valuation considerations for the venerated firms as their revenues and earnings are sure to decline under the auspices of Fed regulation. Further de-levering also has negative implications for the market as it entails more liquidation. Hopefully this will be done in an orderly fashion now that the conversion is underway.
Observation # 5
The final shoe hasn’t dropped yet.
There is more to come. For instance, the financial system has yet to deal with $1-trillion in Alt-A securities and further degradation of the CDS market and counter-party risks.
Absolute Return Partners states that the commodity bull is just the final leg of the liquidity super-cycle: take a look the Economist’s VAR-VAR-Voom chart.
Observation # 6
Leverage is ‘dead’ but capital is not.
Global savings rates now exceed 20%, except in the US, and while this is a positive for global stability, the question remains about whether investors are willing to invest money where it is most needed, the shore up the world’s banks. Failing that, property prices will need to stabilize before we can expect better times.
Observation # 7
The end of the crisis looks further away than it did a year ago.
Its complicated, very complicated.
Commodity price induced inflation has made it hard for policy makers to reduce interest rates. Despite this, interest rate cuts may not be the magic bullet and in 20 of the 36 countries recently surveyed by Morgan Stanley, real short-term interest rates are currently negative.
At this point the $700-billion Treasury/Fed proposal appears to be a solid response, as does the stimulus injections of cash into markets around the world.
This problem remains possibly years away from being done with.
Observation # 8
Traditional risk management has lost its way.
Paul McCulley of Pimco touched on the subject in the July 2008 issue of Global Central Bank Focus:
“[...] every levered financial institution - banks and shadow banks alike - decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed.”
In fact, while it is known that PIMCO was regularly consulted by Secretary Paulson, it was Paul McCulley who rightly proposed in his newsletter during the summer, that the only real solution would consist of the formation of a new government agency to create a market to thaw frozen or cemented assets. This would be the only viable long term solution.
Conclusion
Where is the opportunity? According to Absolute Return Partners, real value is to be found in credit instruments. This is where the most damage has been inflicted and it is where the biggest bargains are to be found in today’s markets.
What would you rather own? Equities which trade at 15-20 times earnings or credit instruments trading at a fraction of that cost? Deutsche Bank estimates that senior secured loans are trading at an implied PE ratio of 5-less than a third of the cost of equities.
You may read the full original version, at Observations on a Crisis, Courtesy John Mauldin
Tags: Banks, BRICs, Canada, CDS, Chart, China, Credit, Credit Crisis, EFU, energy, Fed, Focus, Food prices, GDP Growth, Gold, inflation, interest rates, Japan, liquidity, Markets, Mortgage, Paul McCulley, Paulson, PIMCO, Savings Rate, Trading, Value
Posted in Markets, inflation | 1 Comment »
Today’s trading in the oil saw the front month October contract, which rolled over today, close at $123, opening up a 12% spread between itself and the 2nd month November contract. During the course of the day it traded up as high as $130. When traders smells a short squeeze, they tend to pile in.
Word is that a large investor got caught on the wrong side of the trade and moved to cover a large short position.
The CFTC is said to be investigating the cause of today’s anomalous trading.
AP reported, “Phil Flynn, analyst and oil trader with Alaron Trading Corp. in Chicago, said the late-session surge in oil appeared to be the result of a large investment fund scrambling to cover their short positions, or bets that prices would fall.
“When people sense that someone is short, it’s like blood on the streets. It just accelerates the rally,” Mr. Flynn said.
The November contract closed at $109.37 also up sharply by about $6.62. If the price of oil manages to maintain above the $108-109 level, it may break the current downward trendline established since oil began its correction from the July $147/bbl peak .
It remains to be seen if energy prices will be impacted by a recession-led fall in demand. At last glance this evening, the November contract was trading just below 109.
Charts: Bespoke Investment Group
Tags: Chart, energy, Miscellaneous, Recession, Short squeeze, Trading
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Barry Ritholtz of the highly followed Big Picture blog, submits that the last time the market behaved the way it has, posting its two biggest days since October 1929, what followed, can only be described as a cataclysmic drop in stock prices. Beware of the bear market rally.
To read and see further, visit Industrials: Biggest 2 day rally since 1929
Courtesy: Barry Ritholtz, The Big Picture
Tags: Barry Ritholtz, EFU, SMI, The Big Picture
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The following chart shows how the ten sectors of the S&P 500 performed this week in the context of the government’s credit market intervention. Only energy (on oil’s price recovery) and financials (on bailout) made progress while eveything else was down.
It was a crazy week in stocks too. Merrill Lynch (MER) was the best performer on news that it was being acquired by Bank of America (BAC) and AIG was the worst performing stock on news that it would receive a two-year $85-billon loan from taxpayers.
Charts: Bespoke Investment Group
Tags: Chart, Credit, Credit Market, energy, Financials, Miscellaneous, S&P 500
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Oil prices rallied back over $100 in the midst of this weeks turmoil, to close Friday at $104, up $6. According to the current downtrend, oil, which appears to be in a bull market consolidation, is likely to continue lower for the time being, unless it can break the trendline and close above $108-$109.
Chart: Bespoke Investment Group
Tags: Chart, energy, Oil Prices
Posted in Markets | 1 Comment »
September 17, 2008 - The fall in the price of oil during the past two months may not have surprised everyone, but its dramatic nature and swiftness was unexpected. One analyst who got it right was Rob Fraim of Mid-Atlantic Securities. With crude down by almost 40%, a new report on energy has just been published by Rob.
This report is worth perusing for two reasons: (1) Rob has a good long-term track record in this sphere, and (2) a common-sense approach and findings with which I mostly concur. Here are some excerpts from his current report.
Today I will tackle one of the (many) issues with which market participants are grappling. And I will have a sector recommendation that has “hero or a goat” implications for the writer of this missive.
I am cogitating on the disruptions and disasters in the financial sector – and the implications for the broad market. At some point you will hear from me on that subject as this mess unfolds and I feel that I have actionable thoughts to share.
Today though – we talk energy.
I’ll probably get tons of e-mail taking exception to my conclusions and citing multitudinous arcane bits of Economist World data. And I will gladly receive these and will appreciate the input. But that doesn’t have to mean that I will necessarily agree or find reason to change my conclusions.
I am approaching this … and I don’t want to use the word “gut feeling” – given that I believe that I have sound reasons for my opinion on this – but there is a certain amount of “feeling” involved in the process and conclusions. What I see in market action, what I hear from clients, what I sense in the mood of market participants, what I observe in the market’s reaction to events. And with all due respect to economists, the market is often more art than science. So I don my proverbial beret, pick up my figurative brushes and paint, and present my art project. Some fact, some feel, lots of opinion.
What a bleak mood in the energy patch. What a sickening slide. What the h*** happened? What an … opportunity?
Back on June 10, in a piece I wrote entitled “Oil – Whither Goest Thou? ”I gave the opinion that crude oil – then at $136 a barrel was overextended and due for a correction. I said that the $100 or so area looked about right. Of course oil promptly rallied to $147 or whatever it was and I was a stoopie-head for a little while. But since then, well … hey, hey what a genius, huh?
You don’t believe that I actually got something right? OK, you force me to quote/copy/paste. Here is an excerpt from the June 10 flash in which I recommended lightening up on energy stocks:
“Do I think that oil is going to $50? Not a chance? Not $50, not $60, not $80. But I do think that there is a better than average chance that we are going to revisit $100-ish and stabilize there for a while.
“This being the case I am suggesting that reaping some profits and reducing energy positions a bit might be a wise move – at least on a trading basis. Keep a core holding for the long-term, but lighten up. Sell some stuff. Write some covered calls. Hedge a bit. Maintain the core but trade with part of your energy investments. Do something other than get whipsawed.
“… It would not surprise me to see $100-105 oil by the end of the year. That probably equates to gasoline in the $3.50-ish area.”
Of course after that I went on to elaborate brilliantly (oh all right it wasn’t that brilliant, but I did elaborate) on the reasons why I was – at that time, in June – becoming cautious on energy. Recapping (sans the details) the reasons for the selling recommendation were:
a) Demand destruction resulting from changing consumer and transportation industry driving habits and vehicle choices
b) The potential for a rise in the US dollar
c) Slowing demand for China with the Olympics build-out winding down
d) Modest production growth – specifically from Russia
e) Comments from the Saudis saying that there was no justification for the rise in oil prices that had occurred.
Hmm … not too shabby on those points if I do say so myself.
And then I stated the following:
“When the crowd is virtually all leaning in one direction on a sector, you have to take advantage of it at some point. You just have to. Right now everybody says that financials are garbage and energy is gold, and we of course know all of the reasons for both. But just you wait and see… 12 months, 18 months out – when quality banks have risen 30% in price – the analysts will fall in love with them again. And if energy stocks go down 20% the cries to sell will erupt. We have to take the opposite side of the masses sometimes. We. Just. Have. To.”
So as it turns out I was reasonably on target with those comments and the call to reduce energy holdings for a while. (You know what they say about even a blind squirrel finding an acorn every now and then.) Now the burning question on the minds of my readers is this: “What now, Rob?” Well, again, I don’t know how many minds are burning and hearts yearning to hear the answer, but I’ll take a crack anyway.
I don’t expect a huge rally in oil in the near term, but I do believe the correction has just about run its course. Recently when crude approached $100 on the way down, OPEC began the “defending” process by announcing some production cutbacks – hoping to maintain $100 as floor of sorts. But now with the disruptions across all segments of the market, oil prices have moved right through that level – particularly yesterday as panic hit all markets, trading below $92 as I write this. I would not be surprised to see OPEC coming back with more production curtailments.
I am somewhat more bullish on natural gas prices than many analysts I have read, more based on seasonality, but also because of increased focus on natural gas use. (We’ve all seen the Boone Pickens/Aubrey McClendon ads. And we are approaching an election – what politician is going to badmouth natural gas? Heck, Nancy Pelosi said that it isn’t even a fossil fuel. As to the seasonality play, I have had some success through the years in buying natural gas stocks in the fall prior to our entering the heating season for a trade out as spring approaches.
So, I’m kind of reasonably positive on oil itself – the commodity – for the short term. I’m growing more bullish on natural gas – against the opinion of some smart people who feel otherwise.
The key point though is that I am getting significantly more interested in the stocks of the energy companies. Why? Because it doesn’t take $140 oil for the energy companies to make a lot of money. They do very nicely at $100 and the resultant decline in gasoline prices (once we get past this hurricane pricing anomaly) will calm down some of the finger-pointing and windfall profit-espousing by the politicians.
And the prices of the energy company stocks – oil and gas producers, drillers, coal companies, energy trusts, MLPs, alternative energy … the whole bunch of them – have just absolutely plummeted over the last couple of months and it (again I hate to use the word but here I go) feels like a bit of a selling crescendo taking place.
I have made the comment to a number of people the last few days that it seems that we have margin clerks running billion dollar portfolios. We know there was a liquidation of a large energy-focused hedge fund recently