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.

For more see: $75 Oil Makes Shale Oil Unprofitable

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