For a minute there I thought I had to get off my couch, when all the while the fact is we don't have to do anything much but keep things afloat for just a few decades more! In fact, we'd best shut up about PO, because if our offspring finds out we knew about it all along, they'll turn and wring our necks come 2036!
Posted: Wed May 14, 2008 3:28 am Post subject: Re: Trader's Corner 2008
FWIW
Quote:
Slower global economic growth won't halt rising oil prices because supply is failing to keep up with demand, according to Jochen Hitzfeld, a Munich-based economist at UniCredit SpA.
``Since the fourth quarter of 2007, demand has been roughly 2 million barrels per day above supply, which is stagnating at close to 85 mbpd,'' Hitzfeld wrote in a research report today. ``The falloff in demand for oil because of the global economic slowdown will trigger only a slight decline in this primary deficit. We anticipate a drastic inventory rundown.''
The chart of the day tracks the increase in crude-oil futures traded on the New York Mercantile Exchange, showing the average prices of $74 for 2007 and $103 so far this year in green. Hitzfeld today raised his 2008 forecast to $115 from $100 previously, and his 2009 forecast to $125 from $105. Those predictions are shown in red.
``Analysis of the 230 most important new production projects shows that even if all projects can be realized as planned, therewillbeasupply/demandgapof12.5mbpd,orcloseto15percentofcurrentdemand, in coming years,'' Hitzfeld wrote. `` Without counter-measures, this will undoubtedly trigger a supply crunch and escalating oil prices.''
Source: May 13 (Bloomberg)
Quote:
Here are three facts about oil: it is a finite resource; it drives the global transport system; and if emerging economies consumed oil as Europeans do, world consumption would jump by 150 per cent. What is happening today is an early warning of this stark reality. It is tempting to blame the prices on speculators and big bad oil companies. The reality is different.
(continued)
Similarly, it is not even true that the investment needed to boost the constrained production capacity has been lagging. The WEO shows that nominal investment by national and international oil companies more than doubled between 2000 and 2006. But real investment hardly increased, because of a global scarcity of rigs and associated skilled labour services. Against this background, it seems far more likely that such speculation as there is has been stabilising, rather than destabilising: in other words, it is moving prices in the right direction, in order to reduce demand.
Will the high prices succeed in doing this? Certainly. Demandhastomatchsupplyforasimplereason:wecannotburnoilthatdoesnotexist.
On balance, it is quite unlikely that aggregate demand for oil will collapse, as it did after the two previous price spikes, just as it is unlikely that massive net new oil supplies will come on stream in the near future. This does not mean that prices will remain as high as they are today for the indefinite future: such stability is improbable. But it means we should expect a sustained period of relatively high prices even if “peak oil” theorists are proved wrong. If proved right, this would be true in spades.
So what should be the response to these simple realities? Here are some obvious “do nots” and “dos”.
First, do not blame conspiracies by speculators, oil companies or even Opec. These are the messengers. The message is one of fundamental shifts in demand and supply. If speculators push prices up in response, they are helping the adjustment. Even if Opec keeps output back, it is preserving a valuable resource for the future.
Second, do not blame the emerging countries for their growing demand. Citizens of rich countries must adjust to the higher prices of resources that the rise of the emerging countries entails. The only alternative is to attempt to destroy those hopes. That would be a blunder and a crime.
Third, understand that prices at these levels are now playing a big macroeconomic role. At $100 a barrel the annual value of world oil output would be close to $3,000bn. That is 5 per cent of world gross product. The only previous years in which it was higher than that were 1979 to 1982.
Fourth, adjust to high prices, which will play a big part in encouraging more efficient use of this finite resource and ameliorating climate change. The current shock offers a golden opportunity to set a floor on prices, by imposing taxes on oil, fossil fuels or carbon emissions.
Fifth, do try to reach global agreement on a pact on trade in oil based on the fundamental principle that producers will be allowed to sell their oil to the highest bidder. In other words, the global oil market needs to remain integrated. Nobody should use military muscle to secure a privileged position within it.
Finally, do become serious about investing in basic research into alternative technologies. Energy self-sufficiency is an implausible goal. Investing for a post-oil future is not.
We are no longer living in an age of abundant resources. It is possible that huge shifts in supply and demand will reverse this situation, as happened in the 1980s and 1990s. We can certainly hope for that happy outcome. But hope is not a policy.
UPDATE: the conclusions (in the article below) are a little too negative in my opinion. certainly the euro has reduced cross border hassles and encouraged travel and investment. it may have even helped to keep some club med countries from shooting themselves in the foot as they tried to devalue their home currencies in response to US weakness and external competition a la BRIC and other currency manipulators incl. GCC dollar peggers who are suffering double digit inflation instead of reaping the full gains from their export earnings.
Quote:
Germany has transformed itself and done quite well. France and Italy have struggled. It is hard to believe that isn't roughly what would have happened if they had stuck with the deutsche mark, franc and lira.
Jobs have been created under the euro. Unemployment is significantly lower across much of the region. Again, though, that may have happened anyway as labor markets were gradually liberalized. It is hard to see that the euro helped much.
Other measures have been less impressive. Productivity growth has dropped from an annual average rate of 1.5 percent in the 1990s to only 1 percent this decade. Long-term, without higher productivity, you won't get any richer. Per-capita income in the euro area was about 70 percent of the U.S. level when the euro was introduced. It's the same today. That's hardly the transformation the creators of the euro were looking for.
Posted: Fri May 16, 2008 8:59 am Post subject: Re: Trader's Corner 2008
Crude touches $127.82 today. I think we will see $137.20 based on last year's close, but that is a post for another day. A summary of the week's recommendations. GS seems positively bullish on almost everything!!
Quote:
Considering All Options
Options on energetic upside
Our commodities analysts expect further strength in oil prices. We generally like buying calls on the energy complex as a way to participate in the upside tail of this distribution. Calls look most attractive on the commodity, XLE, RDXUSD, Gazprom, ENI, US integrateds, and INPEX.
Expect oil to rally in structural bull market
Our commodities analysts expect long-dated oil prices to rally as the market seeks a new equilibrium. This year's 37% rally in 5-y oil forwards is only two-thirds that experienced in Jan-04/Sep-05. Their new December 2008 forecast is $144/bbl for long-dated crude. Related to this view, our regional portfolio strategists suggest overweights in energy.
Top call buys
On a macro level, we like buying calls on oil, USO (oil ETF), XLE, and
RDXUSD. These offer high potential returns on premium if the oil price rallies above our forecast. Among single stocks, our top call buys are Gazprom, ENI, US integrateds, and INPEX. In most cases, these stocks offer
(1) high historic sensitivity to the oil price vs. low current vol, and (2) high returns on call premium if stocks rally to GS targets near term.
Vol still inexpensive enough to own, particularly on equities
Oil-commodity implied volatility is up dramatically, but we would rather be buyers than sellers as
(1) implied realized spreads are reasonable,
(2) consumers may need to re-hedge upside following the re-basing higher, and
(3) vol was up in the 2004/05 re-pricing period. Energy equity implied volatility, at least in the US and Russia, looks like good value too, down relative to commodity vol, and down relative to broader index vol.
Correlation provides another source of alpha within this view
(1) Energy shares tend to be well-correlated, but if we're right, correlation may be even higher. Buying calls on baskets, or buying worst-of calls are limited-loss, long vol trades, that benefit from rising correlation.
(2) We believe further energy price upside is a downside risk for the broader equities. Outperformance calls on energy sectors vs. the broad market are long-volatility, limited-loss trades which monetize this view and would benefit from a decline in currently high energy/market correlation.
Source: Goldman Sachs Strategy Research
May 16, 2008
Quote:
Europe, Middle East & Africa: Portfolio Strategy
Higher oil prices: Opportunities within EMEA
Our Commodities analysts have raised their average 2H08 WTI price forecasts to $141/bbl. We search for opportunities across the EMEA space and highlight commodity and consumer/infrastructure stocks in the region. We remain positive on UAE, cautious on the South Africa consumer, and focus on oil & gas and consumer stocks in Russia.
2H08 WTI price forecast raised to $141/bbl from $107/bbl
Oil is experiencing a structural re-pricing similar to that of 2004-05. The sharp rise in prices is driven by supply constraints; our Commodities analysts estimate that long-term trend oil supply growth has fallen to just 1.1% pa which compares to global GDP growth of c.3.8%. Given this imbalance, long-term oil prices will need to rise to bring trend oil demand growth in line with supply. They expect prices to rise on average 14% from here in 2H08.
Two themes: Commodities and consumer/infrastructure stocks
We look for opportunities to gain exposure to the commodities theme across EMEA equity markets. We highlight two baskets: first, we highlight oil and resources companies in Russia, South Africa and the UAE. Second, we highlight consumer and infrastructure companies from the same countries which should benefit from a general rise in wealth across the region.
Reiterate recommendations in the UAE, South Africa and Russia
We reiterate three of our key ideas. First, we reiterate our positive stance on the UAE and highlight two trades: 1) our two baskets GSECDUBA and GSECABDD, and 2) our key stock ideas from the region. Second, we remain cautious on the South Africa consumer. At an index level we recommend implementing a long commodities versus short consumer view by taking a relative view of the JTOP40 relative to the FINDI. We remain cautious on our South Africa consumer basket GSECSACC. Finally we highlight our Russia team's sector ideas - they recommend an overweight stance in oil and consumer sectors. Our Options strategists also recommend buying calls on Gazprom.
Source: Goldman Sachs Strategy Research
May 16, 2008
Quote:
Europe: Portfolio Strategy
Oil on the boil ... again: Trading rising long-dated oil
In our view, supply constraints and a lack of scaleable substitutes are set to continue driving the long end of the oil curve higher. Our commodities analysts have raised their average 2H08 WTI price forecasts to $141/bbl from $107/bbl. We recommend several commodity and equity market strategies by which investors can benefit from this theme.
Long-dated oil prices set to rise sharply
Oil is seeing a structural repricing similar to the experience of 2004-05. The sharp rise in prices is driven by supply constraints; our commodities analysts estimate that long-term trend oil supply growth has fallen to just 1% pa, compared with global GDP growth of around 3.8%. Given this imbalance, long-term oil prices will need to rise. Accordingly, our commodities analysts expect prices to rise on average 14% from here in 2H08.
Trading higher long-dated oil
In the commodities space, we believe the best way to take advantage of the theme is through the S&P GSCI enhanced commodity index, which targets the long end of the oil curve. Within equities, the relative performance of the US oil sector has historically tracked increases in long-dated oil, and for European investors, long/short index pairs of Norway/Sweden (OBX/OMX) and Russia/Germany (RTSI$/DAX) have been sensitive to the theme. In EMEA, investors can invest directly in commodities stocks or gain exposure to the relevant regions via infrastructure/consumer stocks.
Impact of high oil prices on European equities
We believe higher oil prices combined with slow global growth will be a drag on European equities. The long-term correlation between moves in the oil price and the equity market is low, but in 2004-05 - the last time oil prices rose dramatically - the negative correlation rose to -40%. The implications for non-oil sectors are generally negative, especially for consumer-facing areas such as travel & leisure and retail.
Options on energetic upside
Our options team has also published a note on its top call buying ideas in the energy space (Commodity calls, XLE, RDXUSD, Gazprom, and ENI). See Considering All Options, Options on energetic upside, May 15, 2008.
Source: Goldman Sachs Strategy Research
May 16, 2008
Quote:
Energy Watch
A lesson from long-dated oil: A steadily rising price forecast
The market is once again searching for a new equilibrium as it did in 2004. In a structural re-pricing, the status quo is neither stable nor spiking prices but rather upward trending prices until a new equilibrium is reached. To balance trend global GDP growth of 3.8% against trend supply growth of 1.0%, prices need to rise on average 14% from here in 2H08.
Long-dated oil prices are driving the market again
The current oil market is experiencing a structural re-pricing much like it did in 2004-2005. After remaining stable for more than two years, the long-dated oil price (five-year forward) is once again driving the oil market. And like 2004-2005, as the rise in long-dated prices drags spot prices to ever-higher levels, speculators, a weakening US dollar, and "risk premiums" of all kinds have once again been looked to in order to explain a market that seemingly defies fundamentals.
The "revenge of the old political economy" constrains supply
This time we cannot simply make the argument that long-dated prices will rise until they reach a point that motivates large scale investment in non-conventional resources, as over the past four years the industry has hit significant constraints on scalability of these technologies. This is due to "the revenge of the old political economy" (resource protectionism) which imposes significant policy constraints on the free flow of capital, labor and technology that are substantially limiting supply growth. These constraints have ultimately slowed long-term trend oil supply growth to 1.0% pa while at the same time trend global GDP growth has accelerated to 3.8% pa.
Long-dated oil prices need to rise at a rate which will force trend deman growth inline with trend supply growth
Given this imbalance, long-term oil prices will need to continue to rise to bring trend oil demand growth inline with trend supply growth. Strikingly, the rate of increase in long-dated oil prices today is nearly the same as it was in 2004, roughly 55% pa, which using historical relationships is the rate of increase required to achieve long-term balance in the market given the current supply and GDP trends. Our analysis suggests that long-dated prices will drive spot prices on average 14% above current levels, leading us to raise our average 2H08 WTI price forecast to $141/bbl from $107/bbl.
source: Goldman Sachs Commodities Research
May 16, 2008
Quote:
Americas: Basic Materials
Commodities in Crosshairs - May 2008
Industry context
We stand solidly behind our previously stated view (see our report dated March 14, 2008) that, despite most commodities already being at or near record highs, we see secular reasons why commodity prices could go meaningfully higher.
Source: Goldman Sachs Global Investment Research
May 16, 2008
GS have so far been more right than their competitors in the commodity sphere this past several years, but MS and ML now feel strongly that we are melting up to unsustainable levels in commodities against the backdrop of a weakening global economy as financial flows turn a strong demand based rally into a bubble.
Quote:
Michael Hartnett, chief emerging markets equity strategist at Merrill Lynch & Co., talks about the effect of the dollar's rally on commodity prices.
``What didn't happen was that commodity prices didn't fall, which is what you kind of would expect with the dollar picking up. The risk of that inability of commodity prices to correct as the dollar rallies is going to encourage more people to capitulate into the commodity story.
``That's an anomaly and anomalies don't last forever and it's somewhat worrying for someone like myself who is overweight Russia and Brazil and enjoying seeing those asset prices do very well. It worries us to see the dollar rallying and what should be happening isn't happening, which tell us there's some speculative activity, which argues that this move in commodities is going to be short-lived.
``It is a flight to visibility, the visibility of earnings in the energy sector and the materials sector.
``The visibility of commodity revenues is very high and the visibility of other types of revenue is not very high.
``One of the stories of the year thus far is the capitulation into revenue and earnings visibility and that's in the commodities.''
On different commodity sectors:
``There's a tremendous bullishness in agriculture and coal, those are probably the two that people have the deepest conviction for, at least in the short term. There's still some nervousness about the metals.''
On fund flows:
``There will be some shifts in the summer out of the very successful commodity plays into the unsuccessful credit plays. What we have seen since August 2007 is the commodity plays outperform credit plays, large-cap out-performing small-cap, Latin America out-performing Asia, Brazil and Russia out- performing India and China.
``Ultimately we feel that the bull market in commodities, and the bull market in emerging-market equities, is unfinished.
``Clearly gold is the one you don't want to own in a dollar rally.''
Source: Merrill's Hartnett Says Commodity Prices Should Ease on Dollar
Two different opinions, although one is considerably stronger than the other. Or at least more forcefully argued. Have a nice weekend. Cheers. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Sat May 17, 2008 3:48 am Post subject: Re: Trader's Corner 2008
Quote:
GS have so far been more right than their competitors in the commodity sphere this past several years, but MS and ML now feel strongly that we are melting up to unsustainable levels in commodities against the backdrop of a weakening global economy as financial flows turn a strong demand based rally into a bubble.
ML sucks my mother's broker for ML suggesting offloading some energy positions awhile back, of course we all know happened.
I just love what this guy says ,"unsustainable". By what measure, for what reason.
Believe me I'm as fearful and paranoid as the next guy and if ML has good reason to unload on the global commodities boom then I'm game. The only caveat being "good reason". I'd like to see some hard figures that would indicates that food, coal and oil prices will go down.
I've put half my portfolio into agriculture and the other half into an oil ETF called USO. Agriculture sucks but USO has been outstanding and I've actually balanced out my loses in agriculture.
Weakening economy China is still at 10%+ , India still over 8%+ and Russia and the Middle East, don't even go there.
I agree the economices of the developed world are weakening but dollar depreciation is certain to have a somewhat deflationary impact in the EU on the order of 10%.
If Paul Volcker were in charge I might take Merrill's statements somewhat seriously. But its an election year in the US and we have got Helicopter Ben himself piloting the US economy.
Its impossible to be absolutely certain about these things but its more likely than not that the we're going to see even crazier levels of commodity appreciation and accelerated dollar devaluation. Of course that's if Ben doesn't take out the global financial system in the process. The whole system will unravel its just a matter of how and when.
Posted: Mon May 19, 2008 8:58 am Post subject: Re: Trader's Corner 2008
ML is likely no better or worse than any other large brokerage firm or investment bank. They are large institutions, and as such one can hardly make generalizations about their staff quality. Atmosphere in the firm as well as its corporate culture usually percolate from the top down. And as these large firms spend so much time and energy poaching staff from one another its really about leadership and not so much individual effort.
Having said that each of the big banks have their own style. I would likely never work for a ML because they are a hire and fire shop. Not the kind of place that I would enjoy working. Others are known for their arrogance. Not an easy feat given the overall level of arrogance in the finance industry.
Goldman seems to be the best of the breed at the moment, and many others have lost a ton of money and credibility trying to match Sach's returns. But everything goes in cycles. Although many seem to prefer to chase last year's returns rather than focus on their core competencies or look to new markets.
I am fairly sure that this credit crisis, calls for higher capital requirements and more regulatory oversight will dent bank profits going forward even after this current downturn runs its course. The financial industry had simply grown too large instead of existing to service the real economy. That business model now looks dated.
However, here is ML's view on the US dollar. I prefer to read everything regardless of who writes it. Either it confirms my own point of view or it gives me something new to consider.
Quote:
Daniel Tenengauzer, New York-based head of global currency strategy at Merrill Lynch & Co., comments on the dollar and other currencies. He spoke at a Singapore conference organized by his company.
``The dollar is cheap. If you take just a very long-term moving average, the dollar is trading quite a bit below that long-term moving average.
``We have a model called COMPASS. That model estimates the fair level for current-account deficits or surpluses in different countries. For the current-account deficit in the U.S., it's almost impossible to come up with a view where the current account will not continue to improve.
``The current account in the U.S. has been improving now for about 18 months and will likely continue to improve for the next 12 to 18 months. We basically have a trade-weighted dollar, which is about 7 percent undervalued. It's undervalued mainly against the G-10 currencies.
``Within the currencies that are expensive, the top three of those are the Aussie, the kiwi and the euro. If you look at the currencies that are cheap, there are the yen and Norway's'' krone.
Source: May 15 (Bloomberg)
If the US dollar is only 7-percent undervalued then I am not sure it is worth rebalancing my portfolio given the risks to an even weaker US dollar on the back of negative investor sentiment. I can get exposure to a stronger US dollar without that risk via the Canadian dollar, for example, and if the euro is overvalued then by diversifying into a basket of CEE - and CHF - currencies I can lesson my exposure to a weaker euro per se. The ruble is another alternative.
The S&P Energy Index (GSPE) broke out to the topside. Thank goodness I am still long some energy stocks still. I wish it were more now. However, I did not think the market would recover as strongly since March 17th as it has, and the GSPE has certainly profited from that rally and higher oil prices.
I really hate to set an upside target, but from its double-bottom at 481-485 it has now reached 661, which is 2-standard deviations from its 21-week moving average. If I was full-long this would be an excellent place to take profit on half of my portfolio. As I am only one-third long my normal size I have no room to really take profit or perhaps miss out should it rally even further. Congratulations to anyone that had the tenacity to stay in. Good work! ; - ))
Quote:
Philip Verleger, principal with PKVerleger LLC, believed the contribution of speculators in the recent rise in energy commodity prices has been exaggerated.
"Cash has been injected into the commodity markets by investors seeking to protect against anticipated inflation," he said. "The cash is not likely to be withdrawn."
Verleger said efforts to push speculators out of the market, such as Larson's proposed legislation, could, among other things, force out a greater number of speculative shorts than speculative longs, thus forcing up prices.
Subsequently, producer hedging would likely decline, thus compounding the price increase.
Economists agree that effective markets require both hedgers and speculators in order to function efficiently.
"Legislation restricting speculators, an important component of the commodity market, could actually increase price volatility," Emond said. "Additionally, a recent boost in pension funds investing in energy commodities may be affecting price volatility."
A paper prepared for Natural Gas Supply Association (NGSA) in October 2006 by Dr. Peter Locke, associate professor at the M.J. Neeley School of Business at Texas Christian University, similarly asserted that a lack of speculative players in futures trade could push prices far beyond fundamental values.
"Almost by definition, speculation leads to both positive and negative profits for speculators, although this fact is often ignored," Locke said, pointing to the massive gas market losses by failed hedge fund Amaranth Advisors in 2006.
Posted: Mon May 19, 2008 2:28 pm Post subject: Re: Trader's Corner 2008
MrBill wrote:
Having said that each of the big banks have their own style. I would likely never work for a ML because they are a hire and fire shop. Not the kind of place that I would enjoy working. Others are known for their arrogance. Not an easy feat given the overall level of arrogance in the finance industry.
LOL MrBill I never grow tired of your sense of humor. It is a fact that mainstream entertainment (movies, TV, books, etc..) often portrays the "financial types" as having big egos. One of my relatives works in the home mortgage industry. There was this 1 person in particular, a mortgage broker, who was puling in over $300,000 / year during the good years. He went by the name of "Top Dog". He even had a customized name plate create just so he can hang that on the door of his office! I have this theory that people at the office call him "neutered dog" these days although behind his back. I wonder if this is common in the "financial industry" or perhaps this person was an exceptional case.
MrBill wrote:
The financial industry had simply grown too large instead of existing to service the real economy. That business model now looks dated.
MrBill there's a grocery store near my place that is more expensive then the other ones further away. It's a full size supermarket with 10 cash registers but most of the time they only open up 2 registers! Every time I've been there I honestly cannot remember there being more than 3 people in front of me in line. There is simply too many businesses out there trying to sell something to a cash strapped society. In a nutshell I think that pretty much describes the world economy these days....or at least that's my theory. At least there's growth potential in the debt collections industry.
MrBill writes:
Quote:
Cube, I have nothing against someone trying to sell me something based on adding-value, but it is when they try to pawn crap off on me that is insulting. Either they think I am stupid or they are stupid or both? But in any case over the past four years or so you cannot imagine the number of times I have knocked-on investment banks' doors offering them business on a silver platter only to be rebuffed. That is the part I have a hard time to understand?
Usually they resurface later asking to establish a business relationship. However, by that time I am overbanked, the spreads are narrower, so their opportunities to earn the best returns are gone. And I just think 'good'. I am not about to pull business away from my best counterparts that were there early for me, so the rest can take the crumbs or lump it! Needless to say the few that have reduced lines and limits during this credit crunch are on my black list when markets recover! ; - ))
Posted: Tue May 20, 2008 1:25 am Post subject: Re: Trader's Corner 2008
Attaching link to graph as size will distort screen. Still quite interesting to have a look at commodity price inflation. I could only go back 5-years on this one (click on full-size for best results).
Stripping out headline CPI (official figures) barely makes a dent in the overall uptrend, so this is legitimate demand combined with financial speculation that is driving those commodities higher. I suppose no surprise to anyone here, but always good for me to see a graph. It just helps me put the figures into perspective being left-brained and math challenged as I am.
The S&P Energy Index (GSPE) has rallied 37.5% since its low in mid-March after doing a 0.382 Fibonacci retracement that stopped almost exactly at 481-485, which was the double-bottom. Were lightning to strike 3-times in one place then the 38.2% rally since then would end approximately at 664-665. Approximately where we are now. Further supporting this view is a nice 5-wave from 481 to 661-662, and, as I said yesterday, we are at or near overbought territory by some measurements. Notice the infamous broadening out formation with higher highs and lower lows coming at the end of an extended rally.
To be honest there is no real reason to believe this is THE top? That is just the technicals that usually take a backseat when the fundamentals are driving. I believe any weakness going forward would be closer to Q2'08 corporate earning results. It is a little early for those estimates to start to undermine support for the broader market here. But I believe that the credit crunch and higher inflation are sapping the end consumer, while squeezing corporate margins by eroding their pricing power.
Japan also lowered its full year GDP estimates this morning. And physical gold demand is down 16-percent year on year due to higher prices. If the bond market is a leading indicator the move out of fixed income and into equity will undermine some strength in the commodity sphere as financial flows reverse direction.
UPDATE: Caroline Baum: always a combination of wit and insight
Quote:
Whether it's the advent of warm, sunny weather here in New York or the anticipation of those lazy, hazy, crazy days of summer, people are starting to get daffy in the head. Folks who are educated enough to know better have started to spout some serious economic nonsense.
Posted: Wed May 21, 2008 9:24 am Post subject: Re: Trader's Corner 2008
Quote:
Energy
Timespread weakening likely too much, too soon
Surging long-dated oil prices put pressure on timespreads
The $4.8/bbl or 4% rally in spot oil prices of the past week, while not particularly impressive in a market characterized by over 30% volatility, has been accompanied by a remarkable change in the term structure of oil prices. Long-dated oil prices have surged by almost $16/bbl since the beginning of last week, while over the same period, long-dated timespreads have collapsed by some $11/bbl. While the increase in back-end prices is similar to that observed two weeks before, the sharp decline in timespreads is the largest weekly decline in long-dated timespreads on record.
The weakening in long-dated timespreads is likely overdone
The current 4% contango should normally be associated with a level of total OECD inventories more than 90 million barrels higher than what we currently expect for the end of this month. While the announcement by Saudi Arabia of a 300 thousand b/d production increase and signs of higher exports from the Middle East have increased the upside risk to our end-of-May inventory forecast, we believe a build of the magnitude currently priced in the long-dated timespread is highly unlikely.
We recommend a tactical long WTI timespread position
While we have emphasized that our forecasted increase in long-dated oil prices would likely be accompanied by weakening timespreads, we believe that the recent timespread correction has been too rapid. Although we remain constructive on long-dated oil prices for the rest of the year, it is unclear at the moment whether the expected near-term timespread strengthening will come from a temporary moderation in long-dated prices or an acceleration in spot prices. We therefore recommend a tactical long position on
August08-December13 WTI timespreads.
Source: Goldman Sachs Commodities Research
May 21, 2008
UPDATE: who are you calling old?
Quote:
Today, the manufacturing sector in Germany is growing as a proportion of the country's total economic output, and Germany looks set to outpace far larger economies like China and the United States as the world's largest merchandise exporter for the fourth year running.
In addition, making all manner of valves, motors, machine tools and robots is providing Germans with something rare in the global economy: shelter from the storm. Thanks to bolt-turning, the German economy grew at an annual rate of 6 percent in the first quarter of this year.
The United States is near or already in a recession, and Britain's financial services industry - the linchpin of the British economy - is getting pummeled by market turbulence, threatening growth there. European economies that boomed thanks to real estate bubbles, like Spain and Ireland, are seeing a sharp slowdown.
"The critics have one point in that the Germans are dependent on the 'old economy,"' said Andreas Rees, chief Germany economist in Munich for UniCredit. "But paradoxically that is an incredible strength of Germany right now."
Indeed, the most serious problem now facing German manufacturers has been born of success - a desperate shortage of qualified engineers.
Source: Germany's strength lies in 'old economy' _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Wed May 21, 2008 11:56 pm Post subject: Re: Trader's Corner 2008
I feel like such an old timer Mr. Bill I remember the days when you were talking about $68 oil. I think oil had just broken $90 and you were telling me that you were cash heavy at the time.
Wow how things change. Heck I just bought crude oil ETF's for myself and they're up 20% , this was only in March. Unfortunately I also bought some agricultural commoditiy indexes that didn't do quite as well. But my oil investments have more than made up for the shortfall in AG.
The real question is this: when do oil prices start going logarithmic? If we the peakers are right and there is an actual deficit of supply at some point oil prices are going to react strongly.
Personally I already feel that they are there already. Being up 20% in two months few weeks is certainly enough evidence for me.
Posted: Thu May 22, 2008 2:15 am Post subject: Re: Trader's Corner 2008
Looking at, say, wheat or copper (see previous charts above) when the corrections do come they are usually very violent, and reflect the limited size and depth of these commodity markets. Basically, the industry insiders and hedgers have already put their positions on based on sound supply and demand fundamentals. The speculators on the other hand are all on the long-side for the most part.
Some market makers may be cautiously shorting the market via puts or writing covered calls, but for the most part no one dares risk being too short in this market. So when those paper longs decide to bail on their positions it is going to be a blood bath. The bids will simply disappear. I think in 2006 we saw a 36% downward correction in just a few weeks. Something similiar is definitely not out of the question.
UPDATE III: open interest falling making market less liquid
Quote:
May 22 (Bloomberg) -- Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.
The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.
``In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,'' said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.
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