Ads 468x60px

Featured Posts

About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Wednesday, 18 February 2015

Oil Is A Slippery Trade

The recent spike in oil underscores how the market is stacked in favour of players with deeper pockets. I believe what we are seeing here is a classic example of a bear squeeze.

Firstly, let’s examine the fundamentals. As we know, the price of oil is driven by the demand for the black stuff and its supply. Looking at the demand side there’s a raft of economic data and recent spate of corporate results which tend to point in one direction, the global economy is beginning to slowdown. The Euro zone is moving in slow motion with many parts of the trading bloc still remaining in an economic quagmire. Japan continues to remain stagnant with lacklustre growth and it looks like it will experience another lost decade. China is definitely in deceleration mode as inventory overload continues to add up and domestic demand shows no signs of picking up momentum.

The US economic recovery, supposedly the strongest link in the chain, might not be what it’s cracked up to be. Recent disappointing retail figures underscore the fact that consumers aren't splashing their savings, from cheaper gas, at the retail stores. In fact, a recent survey showed that households are diverting their savings into rising health care costs. So, cheaper fuel at the pumps isn't juicing consumption. In view of the above, then we can see that on the demand side, there really isn't much that is going to push oil prices moving forward.

If the prospects of higher demand for oil isn't pushing oil price higher then it must be a supply side speculation story. Yes, that view would hold water bearing in mind that inventories are rising at record levels. The glut of oil on the market is now becoming so great that storage is an issue. There are talks about filling up huge tankers and docking them out at sea, like floating oil deposits on the high seas. With oil inventories building up, it’s most likely going to take time for these surplus inventories to work their way out of the system.

Moreover, there is no indication from the largest producer of OPEC, the Saudis, that they are planning to cut output. In fact we are seeing the contrary.

“Two other OPEC delegates, one of whom is from a Gulf producer, said they could not rule out prices dropping to as low as $30-$35 due to weak demand combined with global refinery maintenance in the first and second quarters of 2015,” as reported in CNBC on February 2.

OPEC last November decided against cutting its production despite misgivings from its non-Gulf members. OPEC oil ministers, who decide the group's output policy, are not scheduled to meet until June 5. So, we have no indication whatsoever there’s going to be a change in the supply side issue. Even the recent death of Saudi Arabia's King Abdullah last month has not led to a change in the Saudi oil output policy, which is to continue pumping unabated. Therefore, with global demand for oil stagnating and supplies remaining constant, it can only mean more of a glut of oil on the market moving forward. In view of the fundamentals, there is very little reason to expect oil prices to rise going forward.
So what is this recent spike in oil price down to?

What we might be seeing is a bear or short squeeze.

In other words, oil price is moving sharply higher not due to fundamentals but as a result of it being heavily shorted, then a few big pocket players gang up and bid the price higher. That then forces more short sellers to close out of their short positions, often at huge loses. You get a situation where the deep pockets players bet against the smaller players and it is obvious who wins in the end. It is like a game of poker where you know your opponent has a weak hand, but to see his cards you have got to put more money on the table, which you cannot afford to raise or risk. The deep pocket players know that they have this advantage.

It’s a slippery game and the reality is that more often than not the retailer gets shafted. Only the short sellers with deep pockets can afford to risk runaway losses on their short positions and may prefer to close them out even if it means taking a substantial loss.

The only way to counter act this is to stick to a trading discipline, don't let your losses run. There is no love in marrying your trading position. Better to be a slippery fish than a startled rabbit staring into the headlights when the market moves against you.

You need to keep this in mind; if a trading position looks too overcrowded, it’s time to bug out, evacuate your position swiftly.

Why? Because that’s when the deep pocket players bet against the rest of the market. That’s how a few players get even fatter.

This is what might happen with oil prices over the next trading week. The small retailers come rushing in thinking that oil is about to make a comeback. Mainstream, which is control and managed by the deep pockets will help spin the illusion. They might even engineer the oil price movement to trigger a technical buy signal, again it is all a spin.

But the reality might be oil price moving high on short covering. Then when the herd rush in to buy, thinking that oil is staging a comeback, the deep pockets bet against them again, this time the other way. They take short positions and profit from the fall. Remember it’s a zero sum game. Your green is someone else's losses. Perhaps oil isn't making a comeback, but rather it’s about to tank. It's a tricky game.... At the time of writing this piece oil is at 51.02 USD.

Thursday, 12 February 2015

Currency Wars and A Fist Full of Dollars

We live in challenging and extraordinary times. The beginning of 2015 has seen incredible volatility on the 5.3 trillion US dollar a day foreign exchange market (forex). First to get the ball rolling was the Swiss National Bank (SNB) when it abandoned its three year old currency policy to peg the Swiss franc/euro at 120. The Swiss currency bombshell pounded the euro to a nine year low against the dollar, rattled a basket of emerging currencies and sent investors into the trenches as they rotated out of risky assets and back into safe havens. That propelled gold and silver to new year highs. The modern financial system is a complex interconnected network of entities that when a butterfly flaps its wings in the Amazonian jungle of South America, it creates a hurricane in Central Park. While a handful of pundits may have been able to predict the SNB de-peg to the euro, joining the dots in real time and predicting what impact that would have on other assets across the globe would probably be beyond the scope of human or artificial intelligence. The challenge we face is that we’re unlikely to know all the initial conditions of a complex system in sufficient, or perfect, detail. Due to these infinite variables, it becomes impossible to predict the ultimate fate of a complex system.

Needless to say it would be extremely profitable if a trader could predict the movement of all global asset prices the moment that one event occurs, but it’s probably not realistic.

Nevertheless, by simplifying the matter and focusing on how events might influence a particular currency, stock, precious metal or any other asset class, then a trader has a better chance of predicting its price.

Take for example the Australian dollar. We could predict that the end of the commodity super cycle was likely to have a negative impact on the currencies that have a commodity based economy. I wrote a piece in September 2014, which was posted in December entitled, “Aussie dollar Trouble Down Under,” The Aussie dollar was trading at 88cents to USD “The global economy is slowing down, that is becoming more evident with every bit of data being released and it is likely to accelerate next year”. The sharp decline in world commodity prices, triggered by a slow down in the world economy has reduced the demand for commodities and is depressing prices. Already, this trend is starting to have a detrimental impact on commodity based economies. “Slow global economy and a heavily reliant economy on commodities, means that there may be trouble down under, particularly if the global economy deteriorates further. With a drop in interest rates now likely to be on the cards the sliding Aussie dollar may have just begun making it a shorters delight”. Fast forward five months and that wasn't too difficult to join the dots and call the Aussie dollar trajectory. Today, the Aussie dollar is trading at 0.77 to USD, down a significant 1.3 percent at the time of writing this piece. The sizeable one day fall was due to the Reserve Bank of Australia lowering interest rates, again this move was predictable. When you have lower export earnings due to falling commodity prices, that triggers a fall in Capex and large infrastructure projects. So the central bank responded in the old fashion way by loosening its monetary policy, low interest rates with the aim of propping up business investments and consumer spending.

So what about the Euro? As I predicted in January the euro would experience volatility, it would continue its downward trajectory, which it did do, based on the the European Central Banks decision to launch its own trillion dollar QE programme and uncertainties over the Greek election. I then said that the Euro would reach a bottom following the Greek election and then would start moving upward. This has happened. As far as bad news goes, the Euro has had the kitchen sink thrown at it. With fears over the Greek crisis subsiding and the prospects of good economic data from the euro zone maybe in the pipeline, there might be only one way for the euro now, that is up.

The Swiss franc?

The SNB negative interest rate is saying one thing to foreign investors, your money is unwelcome here. With Russian oligarchs money unwelcome in Switzerland and the US, the euro zone might be one place where they could go next. Note that the SNB isn't done. If they see a further undesirable appreciation in the Swiss franc the SNB could still intervene with more negative rates, or sell the local currency to depress the value of the Swiss Franc.

The US dollar?

That all depends on whether you believe the US recovery is real or an illusion. If it is real, then a rate rise is likely to be on the cards and that would send the US dollar higher.

I don't believe that scenario is likely. In fact there is enough economic data and bellwether earnings to suggest that the US economy isn't doing as well as mainstream depicts. The consensus of a three percent rise in economic activity doesn't seem realistic, bearing in mind that there is no QE to juice assets prices to continue the illusion of a recovery.

I believe that QE is more likely going forward rather than rate rises, bearing in mind that the dollar crisis is hitting US exports. Perhaps US dollar run has done its course and we might see a fall in US dollar moving forward.

End of an Era of Pretending and Extending?

Is this the end of an era of pretending and extending?

You can't solve a liquidity crisis with more debt and the markets should be allowed to play out for lenders. If you were to apply the classic rule of the free market, it is very clear what should happen to those who ignore risk management; they go out of business.
Think of it this way, if someone were to offer a borrower a billion dollars, knowing that they are insolvent and already struggling to keep up with the existing interest payment, then who is the fool?

Lending to Greece was a losing game and getting excited about Greek bonds paying 6 percent interest was ignoring the risk-reward maxim of investing. I remember a year ago investors were getting excited about Greece returning to the bond market and paying 6 percent yields, while mainstream was peddling the Greek recovery story. But how could any investor think that lending to a bankrupt nation that pays six percent yield is a good return and good investing. When a business makes a poor commercial decision it suffers the consequences. Likewise, these lenders, consisting of the European Central Bank (ECB) and the International Monetary Fund (IMF), known as the Troika, played the game of extend and pretend. But when the illusion wears off, the reality sets in that lending to a bankrupt state just delays the inevitable credit default some time down the line. So Troika made a professional misjudgement lending to Greece. Maybe a more cynical view might be that lending to Greece was a deliberate ploy to drown it in debt, strip the nation of its assets, then launch a fire sale. The result being that a few obtain trophy assets at bargain prices, thereby making spectacular profits at the expense of the many. Well if that is the case, perhaps the last laugh is then on Greece.

But could the Greek crisis mark the beginning of the end of reckless lending or piranha type of capitalism, which is against the spirit of competition and free markets? The political tide may be changing.

French officials said two weeks ago they would support the new Greek government’s efforts to get the country's economy back to life again after five years of choking on austerity. However, the French argued against any write-down of Greece's debt and insist that Athens should continue with a program of economic structural reforms, which is believed to be the only way of getting the Greek economy back to prosperity.

“France is more than prepared to support Greece,” Michel Sapin, the French finance minister, said during a news conference after a two-day visit by Yanis Varoufakis, his new Greek counterpart. “Greece needs time to put things to work,” he said. But he added, there was “no question” of forgiving Greek debt.

The US is also taking a softer stance on Greek austerity. President Barack Obama suggested the loosening of austerity programs, "You cannot keep on squeezing countries that are in the midst of depression,"

Indeed, Greece is in a desperate state. Its economy contracting by 25 percent and has mass unemployment above Great Depression levels experienced in 1929 and needs emergency funds just to keep the lights burning. Greek Finance Minsiter Yanis Varoufakis said that although Athens was “desperate” for money, it would not seek a 7 billion euro installment on its 240 billion euro international bailout package because it would be required to carry out more bailout terms.

“We have resembled drug addicts craving the next dose. What this government is all about is ending the addiction”, Mr. Varoufakis said, adding it was time to go “cold turkey”.

But could other debt junky European Union member look at Greece and decide that they too need to end the intoxication of debt and pretense and go cold turkey too?

In Spain, Madrid, at least 100,000 according to police estimates (organisers estimated the amount of people was 300,000 people) poured into the streets on the previous Saturday, in a huge show of support for Spain’s new anti-austerity party Podemos. They are riding a wave of popularity after the election success of its Greek hard-left ally Syriza. Supporters carried signs reading “The change is now” as they made their way from Madrid city hall to the central Puerta del Sol square in the first major march called by Podemos.

The Podemos party is another anti-establishment non mainstream political party, which has leapt ahead in recent political polls.
“The wind of change is starting to blow in Europe”, Podemos leader Pablo Iglesias, a pony-tailed former university professor, said in Greek and Spanish as he addressed supporters at the so-called “March for Change”. “We dream but we take our dream seriously. More has been done in Greece in six days than many governments did in years”, the 36-year-old said.

Many in the crowd also waved Greek flags and the red and white flags of Syriza.
The extend and pretend game is going to end up with anti-establishment parties in power.
These parties and the Troika will make an odd bunch when it comes to negotiating debt. Are we on the precipice of a bond collapse?

We live in challenging and extraordinary times.

Tuesday, 10 February 2015

January Effect Indicator

Some traders think that January is a good indicator as to how well a stock market will perform for the entire year. If that’s the case then the January Effect Indicator is pointing to a bear market. The last day of trading in January suddenly tanked 250 points on the Dow which compounded a fall of 3.5 percent for the entire month. The S&P also registered a slightly smaller fall of 3 percent in January.

But don't take the January Effect Indicator as the be all and end all for predicting the stock market trajectory, because for the last two decades the indicator has not been successful in calling the outcome.

Nevertheless, the January Effect Indicator might be accurate this year, as there are a number of fundamental reasons to believe that 2015 might be a bear market, provided that we see no fed intervention. The consensus on the Street is that the US economy will grow by three percent this year and that the Fed is likely to raise rates sometime in the middle of 2015.

But the consensus might be out of kilter with what actually happens going forward.

Last year saw the Fed wind-down its largest trillion dollar fiscal stimulus program in history. The monetary authorities use every tool in their kit, from massive quantitative easing (QE) program to near zero interest rates, yet the needle hardly moved. Despite pumping the system with liquidity and keeping interest rates at historic lows, the US economy only registered a 2.4 percent growth.

We now know the effects of QE. It has very little or no impact on the real economy. What it does do however, is inflate asset prices, inflating equity and bond prices and create real estate bubbles at the expense of everything else.
That has an impact on Gross Domestic Price figures which creates an illusion of a recovery. But it’s a phoney recovery and the reason why the man in the Street doesn't feel better off. 

An inquisitive mind would be looking back at the trillions spent on QE, the purchasing of assets by the Fed and be wondering, with all that money being used to stimulate the economy, (that's what mainstream keep selling) why austerity is necessary. It doesn't make sense, something smells fishy and you don't need to be an economist to understand that.

Let me put some flesh on the bones or the recovery spin story.
Take a look at US GDP, which was marginally better in 2013 to 2014, when it went from 2.2 to 2.4 percent. Considering the Fed threw the kitchen sink at the economy during this period, that really isn't much of an improvement in the growth figure.

However, one good piece of news is that unemployment during that period did indeed plunge, but strangely enough it really didn't do much for GDP (during that same period), which registered only a measly 0.2 percent increase.

So an obvious question you might be pondering is; why didn't that massive reduction in unemployment lift GDP by an equally impressive amount?

What we saw during that period was just a reduction in the unemployment rate. The data doesn't include the long term unemployed, so when people quit looking for a job they don't show up in the unemployment data. Put another way, the long term unemployed have been mathematically eliminated from the system. Furthermore, the jobs being created in the economy were not well paying full time work. If the recovery story was credible, we’d be seeing unemployment fall and a decent GDP rise, but that is not happening.

My question is; how could the consensus view, that the US economy will grow by 3 percent this year, hold water bearing in mind that the massive QE programme and near zero interest rates resulted in a growth rate of 2.4 percent? The very same pundits estimate that interest rates will rise sometime mid-year. Therefore, in a higher interest rate environment with no QE to create an illusion of growth, where will this growth come from?

Moreover, the collapse in the super cycle commodity prices and oil price has resulted in a cut in infrastructure spending around the globe and to top it all off there has been a string of disappointing bellwether earnings.
It wouldn't surprise me if we get US growth downgraded soon.

In view of the economic reality, it would seem unlikely that the Fed would raise rates in 2015.
Perhaps we have more chance of seeing another round of QE, maybe QE4. After all, what else can the Fed do when the illusion wears off and stocks start heading south? With interest rates held already low for an historic period, the only tool left in the kit is QE.

But the monetary authorities will try and find an excuse to bring QE to the rescue, as they can't blame the deteriorating economic prospects on a failed economic policy. So they may blame the problem on a dollar crisis, or problems in Europe, the slowing world economy, or even that inflation is too low.

However, more QE isn't the solution, it may be part of the problem.
Although having said that there is one obvious positive for another round of QE from the fed, that it would depreciate the US dollar and that would be most welcomed by US exporters.

If we did see another round of Fed QE, it would end the US dollar rally and do more of the same, blowing more air into equities and bonds. It might also spur on carry trades and that could boost emerging currencies too.

Time will tell.

Friday, 6 February 2015

Baltic Dry Index

Attempting to predict economic the movement of indicators, such as the likely trajectory of the world's Gross Domestic Product and therefore future demand for commodities such as oil, or the trajectory of currencies, can be daunting. There are, however, clues that can help us gauge the market's trajectory.
For example, the Baltic Dry Index is often overlooked by mainstream but it can be a useful factor in the equation when trying to make an intelligent guesstimate of the trajectory of certain asset prices.

So what is the Baltic Dry Index (BDI), also known as the "Dry Bulk Index"?

The BDI is a shipping and trade index, created by the London-based Baltic Exchange, that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product being transported and time to delivery (speed).

BDI is a composite of three sub-indexes that measure different sizes of dry bulk carriers (merchant ships) - Capesize, Supramax and Panamax. Multiple geographic routes are evaluated for each index to give depth to the index's composite measurement.

Changes in the Baltic Dry Index will give you an insight into global supply and demand trends. The change in the BDI is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, per-production material, which is typically an area with very low levels of speculation. 

The supply of large carriers tends to remain very tight, with long lead times and high production costs, so the index can experience high levels of volatility if global demand increases or drops off suddenly. The Baltic Exchange also operates as a maker of markets in freight derivatives, a type of forward contract known as FFAs (forward freight agreements) that are traded over-the-counter. 

BDI gets a moderate rating amongst analysts.
Some consider it a good indicator, especially when looking for hints of economic recovery, while others think investors shouldn't rely on it, suggesting that it's a long shot to count on this investment tool as a crystal ball to foresee the direction of stock markets or the global economy.

The Baltic Dry Index is a barometer for shipping costs of dry bulk commodities.
Global shipping brokers are asked every workday about their pricing by the Baltic Exchange. The Baltic Exchange consists of more than 600 members as of October 2010, including professionals in the international dry shipping industry and maritime lawyers and arbitrators. The exchange calculates the Baltic Dry Index by estimating the average time charter rate of four indexes that represent the vessel types. Each of these vessels makes up 25% of the Baltic Dry Index.

So what does it mean when the BDI fluctuates?

A rise in the BDI is often interpreted as a bullish signal. If the market is demanding more shipping freight space, then that is an indication of a stronger demand for commodities. If producers are buying more materials, it implies that companies are growing. In other words, when the shipments increase, economies are doing well.

Alternatively, BDI that trends downwards is a bearish signal. Less demand for shipping means slowing trade and stagnating consumer demand and an indication that companies are slowing down their production. 

I like the BDI because the data is more difficult to manipulate, you are drinking close to the source. Actions are limited to those involved with the contract: the people with the cargo and those who have the ship for the cargo. Thus, the index can't be manipulated as the amount of ships has been fixed. 

Nevertheless, the index does have it’s shortcomings.
BDI can be very volatile, at times simulating a roller coaster ride on the charts. The recession that began in 2007 illustrated these swings - hitting extreme highs and severe lows. 
By late January, 2008, the BDI dropped 6,052 points, only to reach its all-time high of 11,440 points in June 2008. But as of November 31, 2008, the index was at its lowest level since January of 1987 - 715 points, added the report. 
Some analysts would say that BDI isn't a useful indicator to determine the stockmarket trajectory. In 2009 BDI was negative but stocks rose. I would argue that is because a QE inspired rally fuelled a bull market, but had little impact on the fundamental economics. In other words, we had negative divergence with stocks heading north and the fundamentals deteriorating.

BDI is a good tool for fundamental analysis but it can't determine what the central banks will do.
The dicey business of speculating the trajectory of asset prices requires many tools in your kit, BDI is just one of them. 

What is the BDI today, Jan 30th 2015?
It plunged over 5% today to 632... That is the lowest absolute level for the global shipping rates indicator since August 1986...

Wednesday, 4 February 2015

Forex Turns Red Hot

The 5.3 trillion US dollar a day foreign exchange market (forex) went red hot in January.

Fortunes have been literally made and lost overnight on this market. The first few weeks of 2015 has been like no other. It started on January 15 with the Swiss National Bank (SNB) abandoning the Swiss Franc peg to the euro, which created a seismic shock on the forex. SNB had burned through billions of dollars on foreign exchange, buying euros and selling francs with the aim of giving their exports a heads up. However, they could do no more against the relentless tide so they decided to cut and run. On that day, the man who bravely bet against the Bank of England and walked away with fame and fortune, George Soros, had almost been squashed by the SNB de-peg to the euro. Shorting the Swiss franc was a profitable move before the SNB de-pegged. But somehow, call it premonition, or survival instincts or good “insider contacts”, Soros abandoned his short trade days before the SNB de-peg, then a few weeks later at Davos announced his retirement. Maybe he thought it was better to leave the casino with his boots and pockets full. Easily being amongst the top ten richest men on the planet, he has had a good spin of the wheel.

Although the legend may have bowed out, the trillion dollar casino continues.
Indeed, with such turmoil on the forex, the big punters are staking some mega bets.

Let's look at a few.

Denmark's central bank cut its deposit rate for the third time in two weeks on Thursday. They have joined the club of charging banks more to hold their money. It now costs banks more money to keep cash on deposits at the central bank. The Danish monetary authorities are trying to defend its long-established currency peg against a weakening euro, which has tumbled since last week when the European Central Bank adopted a EUR 1 trillion-plus ($1.129 trillion) stimulus package. Negative interest rates in theory discourage investors and savers from moving their euro cash deposits into the local currency, thereby depreciating the Danish Krone against the euro.

Some punters are wondering whether this is a repeat of the SNB abandoning its peg. Does the Danish Krone offer the next big opportunity?

The peg, which keeps the exchange rate within a defined range, has come under pressure as the ECB's stimulus plan weighs on the euro. The euro has fallen 6.4% against the dollar this year. Furthermore, the cost for investors to insure against volatility in the Danish krone has spiked, which could be an indication that more traders are anticipating a move.

Nevertheless, no two events are identical. Denmark's peg is a long-standing part of the country's policy. It used to keep inflation low and conditions stable for exporters. But the main difference to bear in mind is that, unlike SNB euro floor peg of 120, the Danish peg also has the support of the European Central Bank, which is likely to be defended under the terms of a European Union agreement.

"The peg is a cornerstone of Danish economic policy and has been so since 1982, and there is a very broad commitment throughout Denmark for the fixed exchange rate", said a central bank spokesman. The Danish krone was little changed against the euro on Thursday.

On Thursday, the dollar climbed to an 11-year high against a basket of currencies and is up 15% in the past year against the euro.

Moreover, some are arguing that there’s no guarantee the krone would appreciate if it were forced to abandon the peg. But I disagree. Apply the laws of logic or physics. If an object is being artificially held stationary, think of the handbrake on a vehicle parked down a steep hill. When the handbrake’s disengaged, gravity takes over and the vehicle rolls forward down the hill.

Likewise, if the Krone were de pegged, market forces would send it shooting higher. More “hot money” would flood in and the monetary authorities would be powerless to stop the trend. It would make a mockery of the terms of the EU agreement.

As I mentioned before, the currencies of countries with oil based economies are likely to continue in a downward trajectory. The Saudi Arabian currency and the United Arab Emerites dirham are likely to make profitable short trade opportunities, in this low oil price environment. At the time of writing this piece 1.00 USD 3.67305 AED Emirati Dirham.

Guggenheim Partners LLC, which manages $220 billion, is about to start betting against the currency of the United Arab Emirates, the dirham, said Scott Minerd, chairman of investments and global chief investment officer at the firm. Guggenheim is also considering betting against the Saudi Arabian riyal and on an appreciating Danish krone, he said.

The currencies don't float freely, meaning that officials in each country peg the currency's value to another currency such as the dollar or euro. So whether the bets pay off depends on whether policy makers will change course. The central banks of these countries aren't obviously giving the market any indications that they are planning to abandon their peg. Frankly, nobody knows what will happen. But assuming that Guggenheim Partners LLC hedge fund bets go sweet, the funds could make $1.5 billion of profit, if the trend goes the other way potential losses are capped at about $30 million, Mr. Minerd saIid.

The upside is more than 20 to 50 times the initial investment, based on 12-month options the firm will purchase, assuming the U.A.E. devalues its currency, Mr. Minerd said.

The trillion dollar casino continues. But notice how the old hands play; minimizing their losses and maximizing potential profits.

Tuesday, 3 February 2015

So what have the bulls got to run with?

We know that a Quantitative Easing (QE) inspired rally will eventually lose its lustre. When central banks around the globe buy financial assets such as bonds and sovereign debt, which is known as QE, it has little or no impact on the real economy. Be patient they tell us, but Japan has been patient for the last 20 years… Of course, if you assemble a panel of talking head bankers to discuss QE, they will sell it to the moon. That is no surprise, since they are the recipient of all that “funny money”, which then just gets recycled in the Goldilocks economy for those high-up the food chain. Then, what you get is billion dollar starts ups and rampant speculation in real estate, creating property bubbles and thereby turning would be first time buyers into a class of permanent renters. QE has done wonders for depriving those who have worked hard, saved hard and are now deprived in retirement of a decent return on their savings. It is cheap money for the elites and austerity for everyone else. Never before in history have we witness the largest transfer of wealth from the masses to a tiny few. We’re not not talking 1 percent, it’s more like .0001 percent. Those tiny few are getting intoxicated on an orgy of QE, spending record amounts on superyatchs, supercars, mansions, and millions on decadent parties, while the masses bleed out. The middle class has been turned into a new burgeoning herd of dollar store shoppers. They are worried about how to fund their retirements and whether their children can find work after years of an expensive education and rising health care costs, in a world where public services are dwindling. A scarcity of well paying stable jobs has meant that they’ve forgotten what a pay rise means. Moreover, the Great Recession has depleted middle class household savings and their wealth is withering. A recent Us Federal Reserve Survey comprising of 4,000 adults confirmed the following;

“Savings have been depleted for many households after the recession”, it found. Among those who had savings prior to 2008, 57% said they’d used up some or all of their savings in the Great Recession and its aftermath. What’s more, only 39% of respondents reported having a “rainy day” fund adequate to cover three months of expenses.

So household savings from cheaper oil at the gas pump is more likely to be saved rather than spent. In a climate of stagnating wages, job insecurity and dwindling public services, the trend may be to save rather than spend. The velocity of money is still at a recession level, households and businesses are hoarding cash. The Great Recession had caught so many people off guard that it may have had a psychological impact on household consumption. Perhaps for an entire generation it has become the new trend to hoard cash rather than spend it for fear of what may be around the corner? Recent consumption data doesn't support the view that households are spending the savings from cheaper oil prices.

Meanwhile, the adverse impact that lower oil price is having on the macro economy is no longer speculation, it is regretfully a reality. Billions of dollars of investments, directly and indirectly associated with oil at higher prices, are being slashed. Moreover, many projects that were viable when oil was at 80-100 USD are losing, making businesses such as the entire fracking industry, likely to be tomorrow’s new sub-prime crisis. The recent slump in oil prices, from 110 USD a barrel in the summer to below 50 USD, could see a repeat of the wave of defaults following the 1980’s collapse. In 1986, 7 percent of energy bonds defaulted, compared to around 1 percent at the turn of the decade. Investors might need to brace themselves not only for poor energy stock earnings but also a wave of energy bond defaults.

With US oil inventories at their highest level in 80 years and the global economy showing signs of slowing down, if the Saudi don't cut output, it can only mean further falls in the oil price going forward. Oil is current trading at 44 USD per barrel, at the time of writing, and if we don't hear news from Saudis about an output cut, we can expect prices to go even lower.

Banks with investment portfolios weighted heavily in energy, wind, solar, oil, fracking and commodities may be ripe for shorting. Also, auxiliary companies supporting the industry either with machinery, heavy earth moving equipment, oil drilling and rigs or services, or related banking and insurance are likely to be hit going forward.

Standard Chartered is heavily exposed to the commodities downturn than many other banks, with such loans making up 15percent of its book. Commodity loans are estimated to have increased at roughly 20 percent a year between 2007 and 2014.

As I said previously, I wouldn't be surprised to soon hear about some major investor in commodities, be it a hedge fund or a commercial bank, going belly up. You don't get such movements in oil and commodities without casualties.

I also envisage liquidity becoming tighter, particularly in the secondary market as energy bonds start to default, although that might be mitigated with QE.

There really isn't much to give the bulls a good run going forward. I can hear the bears growling in the background. It might be prudent to bug out into safe havens for a while.

Blogger Templates