Thursday, November 27, 2014

Oil Price Collapse: Buying Opportunity?

For the past few years I've discussed my "shopping list" of investments I track which I believe have strong long term fundamentals. I like to wait until assets on the list experience major price declines combined with low sentiment levels before making a purchase. Oil has been on the list for the past few years, but I've consistently felt the price and sentiment surrounding it were too high for me to step in and make a purchase.

That has changed.

This morning OPEC announced they would not be cutting production in the months ahead and oil is currently in free fall, down close to 7% on the day at $68 a barrel. Oil is now down 33% from where it was it late June (over $100 a barrel).

Wall Street was thoroughly bullish on oil in June after prices had risen steadily throughout early 2014. Articles discussed why higher prices were imminent due to Russia, geopolitical tensions, and global growth.

Today we read everywhere there is no floor for the price. The discussion is centered around how low oil will eventually fall and the new trading range it will move within over the next five years (estimates range between $30 to $70). The bulls, of course, have completely disappeared.

I'll be a buyer of oil and oil related energy stocks moving forward until it begins to move higher and positive sentiment returns. Will the price fall lower from here? Almost assuredly. I look forward to the panic sales in the strongest companies.

Oil related assets will be added to a buying list that currently includes precious metals, uranium stocks, agriculture, and emerging market bonds. These are light positions as I continue to heavily add cash (U.S. dollars) in anticipation of larger sell-offs coming in other attractive but overpriced markets. I am not making an investment recommendation to anyone, but readers of the site often ask me what I am purchasing today.

Wednesday, November 26, 2014

Grant Williams: Why The Perfect Storm Lies Ahead

Grant Williams is Portfolio and Strategy Advisor for Vulpes Investment Management in Singapore−a hedge fund running $200 million of largely partners' capital across multiple strategies.
Grant has 26 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses.
In the presentation below, Grant walks through history finding parallels to periods of easy credit and consequences of those actions. 

For the text summary and charts included in the topic above (click bottom right box for full screen):

Sunday, November 23, 2014

Foreign Holdings Of U.S. Treasuries Cross $6 Trillion

The most recent U.S. foreign debt holdings were released this week (data through August 2014) showing countries outside the United States now hold a record $6.07 trillion in U.S. treasury debt.

China and Japan remain the largest holders with Belgium growing fast (many assume Belgium is used by China as a remote buying station).

Most of the debt issued by China and Japan is held within their own borders by institutions and individual investors. Understanding where the debt is held will become important as we approach the next stage of the sovereign debt crisis.

For example, while both the United States and Japan will continue to "pay down" their debts through depreciation (central banks purchasing the debt with printed money), when push comes to shove it is far more likely the U.S. government will require foreign bond holders to take a "haircut" on their debt holdings (remember the Greek haircut?). Japan, on the other hand, would only bankrupt its financial system and decimate the retirement accounts of individual citizens with such a haircut.

When it comes to the breaking point, politicians will always do what will keep them in office for just one more voting term, which will be to push back the pain for those casting votes as long as possible. While this type of discussion is most likely further down the road for the United States, the Japanese currency and bond markets can collapse at any moment.

For more see: How Far Could The Japanese Yen Fall?

When Cash Regains Desirability QE Will No Longer Support Stock Prices

From John Hussman this week:

"The upshot is this. Quantitative easing only “works” to the extent that default-free, low interest liquidity is viewed as an inferior holding. When investor psychology shifts toward increasing risk aversion – which we can reasonably measure through the uniformity or dispersion of market internals, the variation of credit spreads between risky and safe debt, and investor sponsorship as reflected in price-volume behavior – default-free, low-interest liquidity is no longer considered inferior. It’s actually desirable, so creating more of the stuff is not supportive to stock prices. We observed exactly that during the 2000-2002 and 2007-2009 plunges, which took the S&P 500 down by half in each episode, even as the Fed was easing persistently and aggressively. A shift toward increasing internal dispersion and widening credit spreads leaves risky, overvalued, overbought, overbullish markets extremely vulnerable to air-pockets, free-falls, and crashes."

When will psychology shift toward risk aversion? It is impossible to know. We do know that we have been in risk-on mode for 5.5 years, the fourth longest period in history without an interruption in euphoric sentiment (red line below). We are still chasing the two longest periods in history which occurred in 1990 and 1921. History now records those as two periods where psychology completely diverged from market fundamentals creating generational speculative bubbles. The current record setting run is viewed as a "healthy bull market with room to run on the upside." My guess is that history will rewrite a different perspective.

The current rally has pushed the U.S. stock market 90% above its long term regression growth line, which has only occurred once before in history from March 1998 to July 2001.

The market cap of Apple recently became worth more than the entire stock market of Russia after already surpassing Mexico and Malaysia. It is closing in on Singapore. This means the market value of a single company, which essentially makes two products, is worth more than every single company on the Russian stock exchange combined.

Profit margins relative to the size of the overall U.S. economy continue to sit at all time record highs (blue line) while U.S. wages continue their secular downtrend (red line). Profit margins have historically been a mean reverting economic data point, however, analysts loading up on U.S. stocks today continue to believe this time will be different.

For more see: Competition: The Key To The Coming U.S. Corporate Profit Mean Reversion

How Far Can The Japanese Yen Fall?

If you read the financial news, most of the charts you see on the Japanese yen probably go back about 5 years making the recent devaluation against the U.S. dollar look massive:

However, if you zoom out a few decades you see that as recently as 1971 the Japanese yen traded at 350 to the U.S. dollar! Even though it has fallen from 76 in late 2011 to 119 this week it has been strengthening for decades leading up to the recent decline. 

A longer term chart helps show there could potentially be a long way to fall from here.....

h/t John Mauldin

Saturday, November 22, 2014

Hugh Hendry's Capitulation: Parts 2 & 3

Hendry walks through the remainder of the macro economic world as he sees it in parts 2 and 3 of the interview below. He covers China in depth in part 3, discussing some trades he has in place in that country.

I discussed the psychology behind this interview earlier in the week, but in part 2 I found it fascinating that he even admits to no longer paying attention to asset valuations (price to earnings ratios, etc.)

For part one see Hugh Hendry's Capitulation: A Microcosm Of The Entire Financial Community

Part Two:

Part Three:

For the full transcript of the entire interview click here.

Thursday, November 20, 2014

$75 Oil Makes Shale Oil Unprofitable

From Bloomberg today: Oil At $75 Means Patches Of Texas Shale Turn Unprofitable

With crude at $75 a barrel, the price Goldman Sachs Group Inc. says will be the average in the first three months of next year, 19 U.S. shale regions are no longer profitable, according to data compiled by Bloomberg New Energy Finance.

“Everybody is trying to put a very happy spin on their ability to weather $80 oil, but a lot of that is just smoke,” said Daniel Dicker, president of MercBloc Wealth Management Solutions with 25 years’ experience trading crude on the New York Mercantile Exchange. “The shale revolution doesn’t work at $80, period.”

To understand why shale becomes unprofitable at these prices I highly recommend taking the time to watch the shale oil chapter from the new crash course:

Hugh Hendry's Capitulation: A Microcosm Of The Entire Financial Community

Hedge fund manager Hugh Hendry rocked the financial world last year when the long time bear announced he was throwing in the towel and turning mega-bullish on stocks. He decided he would chase assets knowing that they were extremely overpriced in economies that were extremely fragile with the simple understanding that central banks around the world would push markets higher.

This shift has been happening to hedge funds managers, institutional investors and individual investors around the world one by one over the past 5 years. In the video below Hendry provides an honest walk through of how difficult it was for him from 2010 through 2013 to do what he felt was the right fundamental thing for his client's money. He notes: 

"I have to say when I look back in the last three years it feels as if the sun only rose each day to humiliate me after that point."

The interview is an encapsulation of the psychological transformation that has been taking place with investors during this central bank driven stock market rally. The smartest people in the world know the house of cards will one day crumble (Hendry made over 30% for his clients during the 2008 collapse), but they cannot withstand the psychological pain of watching the market move higher day after day, month after month. 

Following his bullish mantra in 2013 Hendry found that he was still layering on too much protection for his clients against down turns and selling into danger when markets began to weaken. This, he has discovered, is a mistake he will not be making in the future. 

When the markets turned down in October, he stayed 100% invested and purchased more into the decline. Any decline (or rise) should be met with as much buying power as possible. This mentality has taken hold of market participants around the world, specifically in U.S. stocks. 

How do we know today's markets represent a manic euphoria completely removed from reality? Because Hendry is one of the brightest minds on the planet. Watching him cave to central bank pressure is like watching a captured soldier turn on his country after taking years of psychological abuse at the hands of his captors. 

For the remainder of the interview see: Hugh Hendry's Capitulation: Parts 2 & 3

Stop Wasting Time Focusing On What Should Be

The economics and finance books I read follow a general blueprint with three sections you see repeated over and over:

1. A History Of Finance/Economics Surrounding The Topic
2. What Is Taking Place Now Surrounding The Topic
3. What Should Be Done By Policy Makers & Political Leaders Based On This Information

When I was a younger man I read part three of these books with excitement and hope surrounding the future. In my mind, economic and financial wisdom would find its way into the minds of those making macro policy decisions and the world would begin to move toward a better place.

Today when I finish sections one and two, which I always thoroughly enjoy and appreciate, I stop reading and move on to the next book. When I read finance/economics articles online every week I no longer spend time reading anything that has to do with what the author thinks should be done in the future.


It does not matter because the world is not going to change. I understand this sounds depressing, but it is just the reality of the world we have been given. Any time you spend discussing with people or reading about how things should be is a complete waste of your time. How do I know? I have seven years of archived articles now on this website and my early years were dedicated heavily to this topic.

Your time should be spent further developing your understanding of what is most likely to actually happen and learning how to best profit from that outcome to support your family and help grow the real economy with your personal financial success. Perhaps that can be through the development of business that creates jobs or re-investment into the global economy following the next major economic downturn.

I see the world today divided into roughly three parts:

1. (The 98%) Have no idea what is happening around them have no desire to learn
2. (The 1%) Understand what is happening and try to profit from it
3. (The other 1%) Understand what is happening, get angry, and try to think of ways to take action and "change the system"

Readers of this site fall into one of the 1% categories. Why should you not waste your time in category three? Obviously you are a smart person so you should quickly see that it is 99 to 1 against you. Following a major collapse people within the 98% will get angry for a brief period of time and try to figure out what happened. Then the government will come to the rescue with the next round of "bread and circuses" and they will go back into their zombie state.

I mention this because I caught myself this morning when I finished discussing Jim Grant's new book saying.....'"Perhaps we will finally realize after the next global financial crisis that the best way to stop bubbles is to not blow them up in the first place." Of course that is the correct course of future action, but who cares? It's never going to actually happen. If you find me talking about "what should be" please let me know, and I will do my best to quickly get back to a more important discussion surrounding "what will be."

Jim Grant On The Forgotten Depression

There have been times throughout recent history when central banks have become like mythological gods due to their ability to step into financial markets and "save us" from any further pain.

A period of central bank worship occurred in the late 1990's following ten years of Greenspan intervention. Then it arrived again in the mid 2000's following seven years of larger scale Greenspan intervention, and it is now occurring again following seven more years of unprecedented Bernanke/Yellen intervention.

What is forgotten during times like this is the future consequence of such of actions. We experienced a collapse in 2000 and 2008, and the next hangover will be far more painful than what occurred in 2008; it is only a question of how long they can delay its arrival. 

The economic policies central banks and political leaders follow today are based on the perceived "mistakes" that took place during the Great Depression of the 1930's. The firm belief among those making today's multi-trillion dollar policy decisions is that leaders during the 1930's did not do enough, which led to the unnecessary pain that occurred during that period. 

There was a another depression in 1921, a forgotten depression, that is never mentioned or studied in the tomes of history. Jim Grant has written a new book titled "The Forgotten Depression" that I will definitely be reading over the coming holiday season. In it, he describes how leaders stepped away from the markets and allowed them to cleanse. It created a horrible recession that lasted a short period of time. Assets prices declined sharply and the malinvestment was removed from the system. With a firm foundation in place, the global economy then went on to have one its best decades of real growth in history.

He is asked in the brief interview below, "what would have happened if Bernanke did not step in to save the markets in 2008?" Of course, we will never know. However, we know that 7 years later the global economy is still in stagnation with high unemployment, falling wages, and a far higher cost of living. While the 1% have improved dramatically, the 99% have experienced a decline in living standards. Perhaps we will finally realize after the next global financial crisis that the best way to stop bubbles from bursting is to not blow them up in the first place. 

Much more to come on this important topic in the weeks ahead......

Wednesday, November 19, 2014

Chinese Home Prices Declining

Great chart from Bloomberg below providing a timeline of Chinese cities that are experiencing rising prices, no change or declines. You can see during the last dip in prices during early 2012 it was only some of the cities experiencing price declines while in the most recent data 69 of the 70 cities were in decline month over month.

This is obviously not good news for a Chinese economy that relies heavily on real estate development for growth or a global economy that relies heavily on exporting goods to China to feed that development.