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September 2014

Central Banks Biggest Concern Should Be Market Stability

September 19, 2014 by EconMatters   Comments (0)

By EconMatters
 


Good Year Performance Wise
We closed out our bond short this week and are up 42% so far this year. The reason we closed out our bond short is that we are trying to make money and control risk as much as possible in a market that frankly speaking is off its rockers! Who knows what “Fair Market Value” is for any asset?


Markets are so influenced by Central Bank liquidity that we have little confidence in what the actual ‘market prices’ are for many assets, we strategically take advantage of extreme mispricing’s relative to our models, i.e., the low hanging fruit, and get out of the market. I don`t want to hold anything these days!
Liquidity, Liquidity, Liquidity

As I was shorting S&P Futures late Thursday night it once again hit home how close financial markets are to some major shocks all due to ridiculous amounts of liquidity by Central Banks all over the world. The movements in the currencies as of late are starting to become worrisome, and with the movements on Thursday night I will not be surprised if we start having some currency inspired major volatility in other asset classes.
Strong Dollar

Have you seen the effect of the strong dollar on commodities, silver in particular? I will not be surprised to wake up some morning and find silver trading at $14 an ounce at this point due to some holders getting liquidated in a massive way.
Too Insane That Fed Will Still Be Buying 15 Billion Next Month with S&P at these levels

So late Thursday night Japan hits 2014 highs, then Europe hits 2014 highs, and the US Futures hit all-time highs, and I was struck by the fact that next month the Fed will still be buying 15 Billion of asset purchases for October.
Stock Buybacks & Earnings
This thought further hit home the fact that as earning`s season is just around the corner, I am pretty sure that much of the Dow`s outperformance of late is companies buying back stock to hit their respective earning`s marks. And as Oracle CEO Larry Ellison steps down what did Oracle announce, another 13 Billion in stock buybacks to soothe investors’ concerns. Low interest rates have fueled a ridiculous and unhealthy amount of stock buybacks at the top of valuations, and this has truly distorted financial markets.
Draining Market Liquidity Primary Concern Right Now!
The Fed`s biggest concern needs to be draining the liquidity in the financial system before the entire market collapses, and not the unemployment rate, slack in the unemployment rate, or even inflation at this point. The reason is that sure central banks can pump so much liquidity into the system that markets will not go down, volatility will be reduced, but after several years of artificial support, all the liquidity in the world isn`t going to support an unsustainable market led by disproportional and untimely stock buybacks, asset prices with overextended multiples, and every company in the world coming to the market to cash in on the IPO madness due to robust excess market liquidity.
Retail Investors Get Out of the Market – Don`t be the ‘Suckers/Muppets’ this time!
Retail investors just go to cash because the financial markets are going to crash it is just a matter of when and not if. The Fed will have much bigger employment worries on their hands when the entire financial system collapses because central banks mucked up markets with actual buying of securities in the Bank of Japan, ECB, China and the US Federal Reserve. 
Somebody Has to Have Relative Stronger Currency

We are starting to see the strain in the currencies, and everyone cannot debase their currency at the same time, and the market is starting to look away from the US Dollar being the weak currency, and if this continues gold and silver markets will get destroyed, US corporate profits are going to get hit, and all the stock buybacks in the world are not going to help US Corporations hit the earning`s marks.
Alibaba a $20 Stock without Central Bank Liquidity
It is funny watching the analysts discuss Alibaba`s stock price and what constitutes a proper multiple for the stock, is this pre-Central Bank Liquidity or post-Central Bank Liquidity? Is this before or after the financial collapse of the latest fed inspired bubble? Or China for that matter as their property market isn`t trending in the right direction at the moment! 
Currency Moves & Magnitude of Moves Warning Sign for Markets
I am not calling for a market top, markets will go up until they stop going up, but trading late this week the sentiment that most provoked my psyche was just how vulnerable and shaky the entire financial system is right now, and it is only being masked by massive central bank liquidity, which is ultimately unsustainable, and then what? Look to the currency markets as they are starting to signal that things aren`t all  ‘Hunky-Dory’ right now by the magnitude of the currency moves, there is just too much liquidity in the financial system right now, and that is a ticking time bomb waiting to explode!

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Solar in Oil Drilling: Beat Them, Join Them?

September 14, 2014 by EconMatters   Comments (0)

By EconMatters

Solar energy has garnered quite a buzz lately as China is said to beef up its solar installation this year. Fundamentally, many energy forecast scenarios by numerous agencies suggest while renewable energy would enjoy a higher growth rate, fossil fuels would remain as a dominant global energy source.  Nevertheless, as the old saying goes -- If you can't beat them, join them.  This seems to be what's happening with at least one solar company.

CNBC reported that GlassPoint Solar landed a $53 million investment from Royal Dutch Shell and the sovereign investment fund of Oman for its enhanced oil recovery (EOR) technology. As the company's name suggests, GlassPoint's technology runs on solar power, which produces steam to help pump more fossil fuel from conventional crude oil plays.

According to CNBC, GlassPoint has been using this technique in Oman since 2012, and it helped the firm score more than double its initial funding. According to EIA data, Oman is the largest oil and natural gas producer in the Middle East that is not a member of OPEC, and that EOR techniques have helped Oman's oil production rebound from a multi-year decline in the early 2000s. Oman relies heavily on complex EOR process to extract more oil than traditional drilling—to boost production.

EOR is nothing new to the oil industry.  With much of the world's 'easy oil' already recovered, more and more producers are turning to EOR for prospects of ultimately 30-60% more of the reservoir's original oil.  CNBC quoted consulting firm Ernst and Young which estimated [oil] companies spend at least $5 billion annually on the [EOR] process, and the need for this type of methods to expand the efficiency of wells is particularly acute in places like Oman and Russia where oil fields are getting long in the tooth (see chart below also from CNBC).

Graphic Source: CNBC.com

According to CNBC, GlassPoint's CEO Rod MacGregor noted in an interview that "This application looks like the next step for solar." Take it at face value, this new niche solar technology indeed looks very promising as it could reduce oil projects environmental impact, replacing and conserving other energy source used in the EOR process.  This could become a tremendous growth area for the solar industry, and for companies with the expertise.  But before everyone gets overly excited, keep in mind that ultimately, like any new technologies and methods, it will need to pass the number crunching test.

The CNBC article made no mention of the cost factor.  EOR is already a very cost-intensive process. So given that (1) The economics of solar and other renewable energy is still a much debated issue among experts, and (2) the intermittent nature of solar,  I think the most likely scenario is that the new solar drilling technology would be become part of, but not replace the existing traditional methods. This would put a very different perspective on its growth prospect.

Before the jury is in, solar industry should have no problem getting funding from oil companies that are desperate to gain some kind of positive association with any renewable drilling project.  Whether this niche technology sector within the solar industry could lose support from the environmental cause due to the involvement with oil drilling is yet to be seen as well.        

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10 Year Treasury Short Best Place to be Remainder of 2014

September 10, 2014 by EconMatters   Comments (0)

By EconMatters


Strategically Shorting Bonds
I have been shorting the 10 year Treasury strategically the last 6 months buying the oversold yield conditions right before the employment report ramp up in yields, it has been quite an effective trading strategy this year, and has contributed in part along with some oil and equity trades to being up over 30% versus the overall market returns for both bond and stock investors which we just approximate to the 10% range year to date depending upon exact portfolio mix. 


Another Profitable Trade
Well I am profitable on this latest move up in 10-year yields, and I expect yields to continue rising through the 10 and 30 year bond auctions later this week, and I expect a strong retail sales number on Friday, and with the all-important FOMC Quarterly Forecast Meeting next Wednesday, I expect yields to run up through this meeting on a slow grind higher.
Stay Short Until Year End?
Therefore the question becomes where I close out the trade as I have December expiration 10-year futures contracts, and normally I would close out on a spike before, during or right after the FOMC Meeting. However, when I look around at the market landscape of assets to buy, sell or invest in for the remainder of the year, or in other words if I close out the position where do I go next? And there are just not a lot of appealing alternatives right now! I still view the 10-year Treasury short at least until year end as the best place to park money, as it is all about putting money to work in market places that offer real value, have a catalyst for future upside profit, and the risk reward profile makes sense, and the 10-year Treasury short just makes sense on all accounts.
Value, Catalyst & Risk Reward Profile
First of all the economy is improving, but even if it just maintained the status quo growth of 2%; bond yields are too low given a 2% rate of inflation, and the Fed Funds Rate shouldn`t be at zero percent, that will have to change, and the Fed recognizes this mismatch, even if we only create 140k new jobs each month, that is still lowering the unemployment rate. 
The catalyst is that the Fed is getting out of the bond buying business in October, and they are going to raise rates in 2015. The value proposition is that all bonds from Global European Bonds to US Treasuries are over-valued and mispriced, or in a bubble that the fundamentals cannot possibly sustain. As I said in a previous piece on European Bonds specifically, just park money short every single European Bond or a basket of these bonds, and over a 10 year period you are going to make a good some of money. 
All these bond yields are mispriced compared to the risk profile over a 10 year duration period, and since writing that piece other investors who were short have realized a 15 basis point profit in yield appreciation for those same European overpriced bonds. Some of these European Bond Yields are going to double sometime over the next 10 years, they just are poorly aligned with the fundamentals of the balance sheets of these government`s spending patterns!
All Bonds Are Mispriced and unlike Stocks Don`t have ‘Multiple Expansion’ Qualities
Accordingly the argument that relative to European bonds…..blah, blah, blah….is a complete non-starter for me because those bonds are overvalued by factors of 3 and 4 times, half those peripheral European countries are going to need to be bailed out like Greece in five years’ time. Have you seen their spiraling out of control Debt-to-GDP Ratios of just the last two years? They are headed in the wrong direction without the robust tax generating capabilities like the United States has with an increased budget margin for error luxury due to being the Global leader in many industries from technology, healthcare, energy, agriculture, resources, Research, Education and entertainment.
Apple is a Short at $120
But what other assets represent good setups, I like an Apple short, but I think they are going to have just a blockbuster 4thquarter, and probably two really strong quarters of growth in earnings. After the ‘Big Screen Adoption Cycle’ then I want to come in and short Apple, it is just too early because unlike the last time Apple was at these same lofty price levels, there are fewer shares in the market because of Apple buybacks, and Samsung no longer has a big advantage over Apple in having the best Big Screen Phone. 
But if Apple does get near $120 that is when I will start evaluating a short in the stock, but until then I would rather stay short the 10-year Bond. Unless Apple is going to start making electric cars, they are eventually going to run out of new product categories, and become a commoditized supplier of devices with a much lower stock price and market cap….timing is everything in markets. Apple is a short, just not quite yet for the best setup! The Bond Market doesn`t have a Christmas Buying Season to fade as a short does in Apple where every teenager around the world wants the new cool Apple Big Screen Smartphone and 4th quarter earnings are shockingly good!
Gold is a ‘Meh’ Market
What about the Gold market, the current price just is sort of ‘meh’ for me from a valuation standpoint, I don`t want to really buy or sell Gold at these levels. What`s the catalyst for a Gold Short, a sooner than expected rate hike, I would rather be short Bonds! Is Gold such a bargain right here from the Long Side in a rate hiking environment, not really….if inflation takes off as a potential catalyst for Gold to offset the stronger dollar in a rising rate environment, I have two ways to win by being short Bonds versus Gold!
Equities Always Have Some Form of Bid
What about buying or selling equities, I really don`t want to own equities the valuations are too stretched, and although shorts are appealing, only really after new tops have been established, and shorting makes sense as traders take profits after buying the last dip. 
There is still an abundance of liquidity even with the BOE & Fed tightening with a dire need of some place to go, and equities seem like they will get the benefit of the doubt on any selloffs over bonds by investors which have to fade not only being in a bubble, but one that is facing interest rate hikes or a tightening Fed! 
So what I am saying here is that equities can stay ‘over-valued’ longer than bonds, they can hold in there to some degree during rate hikes, whereas bonds are absolutely going to get slaughtered during the initial adjustment phase of first rate hikes. 
Labor Day Selling of Global Bonds
Again the best place to be is short bonds, and the front of the curve has already gone up considerably, whereas the 10-year short represents the best value from a “yet to be priced-in rate hike reality’ perspective as a bunch of investors were trying to hide out in this area for as long as possible because of so much liquidity they couldn`t help but gorge themselves on chasing yield up until the last moment which seemed to correspond to the closing out of August as the 10-Year has added roughly 16 basis points in the month of September as traders realized they were way off sides going into the back end of the year with a multitude of Fed rate decisions, strong GDP numbers, and a buy the rumor, sell the news ECB QE Decision on European Bond Purchases! 
Oil in No Man`s Land
Everything depends on price, but right now when I look around at bargains in financial markets I don`t really see many investment alternatives out there, now if Oil dropped further maybe it could become a bargain 10% lower. However not here I think it is going lower, and it was appealing to short at $107 a barrel for the WTI contract, but not that appealing here at $92 a barrel. 
FOMC Press Conference
Thus we will see what Janet Yellen says next Wednesday, and where 10-Year yields are after the FOMC Forecast Press Conference. I normally like to take profits on trades, but I really cannot think of a good reason either in better investment alternatives, or the 10-Year yield no longer being mispriced relative to economic conditions that would necessitate me not staying short 10-Year Futures until year end, i.e., the third week in December 2014. 
10-Year Yield 4% Plus in 2015
Shoot I might just roll this trade over into 2015 10-Year Futures from the short side if I still evaluate that this yield is mispriced substantially, and I think this is what captured David Tepper`s Trading Sensibility as well. The trade just makes sense on so many levels, and from a risk reward standpoint with the ability to rollover to catch the meat of the move up in yields in a rate hiking environment, it is the best value on the street as the 10-Year heads towards 4% in 2015.

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Inflation Pressures in Core Food Components

September 1, 2014 by EconMatters   Comments (0)

By EconMatters


Inflation Isn`t Moderating, It is Consolidating before the Next Leg Up
Inflation numbers of late have been helped by the drop in fuel costs, the agricultural grains have been brought down in the futures market by the overplanting of corn, but eating out for the weekend where shrimp, steak, other seafood and vegetables are consumed at dinner brings home the idea that restaurant costs are only going up on the whole, and expect menu prices to continue to be raised at your favorite restaurant. 


Lean Hogs
Lean hogs are up 26% year over year even after a sizable pullback in the futures market, the pork industry really got hit by a killer pig virus, but the trend in other meats for the year indicates that costs for this segment are broader based than just the disease specific issues.
Cattle Herds
For example, Live Cattle futures are up 18% year over year due to a multi-decade low in cattle herds, it seems it is much harder, and the margins are much lower raising livestock compared with planting corn for farmers which makes sense when you factor in all the underlying costs from veterinary bills, feed and electricity, to transportation and regulatory related costs.
Milk Prices
The Dairy Industry hasn`t escaped the inflation pressures with a strong global demand for dairy and protein, producing cows are a robust asset these days. Milk prices have also been hurt by the drought for farmers on the West Coast to stronger demand for Greek Yogurt for alternative protein sources we see Class III Milk futures up a robust 40% year over year with no immediate pullback on the charts.
Oil & Fuel Prices

Oil and fuel prices have dropped but the costs associated with getting it out of the ground are still inflationary from the equipment costs to skilled labor and regulatory related costs so it will be interesting to see how the price of oil shakes out many crosscurrents from stronger demand on an improving economy, geo-political concerns, robust production output domestically, higher fuel efficiency in developed countries, more cars on the road in china, and global pollution and infrastructure constraints with a price that basically has moved between $80 and $120 for WTI/Brent since the financial crisis. 
Normal Trading Range
It is too early to read anything regarding the recent pullback in prices because as just some of the shorts covering caused a $4 a barrel spike in prices off the recent bottom, and the oil market goes on runs both up and down in price that can be anywhere from $10 to $30 and can happen in and out of season although they usually center around seasonal demand as a rule of thumb.
The Bull & Bear Case for Oil Prices
I can make a case for the last 6 years being the pullback in oil prices, i.e., no real price breakouts. And similarly I can make an entire other case that oil will pull back even further on production increases globally, higher efficiency standards globally, alternative fuel technologies, and changing driving behaviors. 
Oil Supply Chain Inflation Alive & Well
But the costs associated with the industry should continue to rise from an inflation standpoint because component parts, equipment, labor, medical, regulatory, transportation logistics and other costs in general are rising at a steady clip for the last 5 years, and look to continue rising going forward for the next five years.
Wages Will Never Keep Up With Inflation on the Average
For some places in the economy inflation is red hot smack in the face of the consumer, in other places it slowly creeps up on the consumer without them realizing, but regardless of what the official inflation reports that the Fed follows indicates, real inflation pressures in the economy continue to rise every year, and a good steak is going to cost consumers a higher hourly wage rate.

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