Posts Tagged 'Oil'

The European Spring: Why Caution is the Best Market Position

In typical Hollywood fashion, the producers of the successful Arab Spring

have announced the sequel,  The European Spring, starring the people of

France.  In fact, pre-filming has already begun for the 3rd installment in

the series, The US Spring which will be airing the first Tuesday in

November.

The French

The French hosting elections on a Sunday is itself an interesting issue; I

have to assume they value their days off during the work week too much to go

to the polls than they value their leisure time on Sundays.  Logistics

aside, the polls point to a victory by François Hollande and socialism again

taking front and center stage in the City of Lights.  (Why shouldn’t

Parisians leave the lights on – the government is footing the bill.)   Of

course, Sarkozy can pull it out in the final days if he is able to draw in

the fence sitters and Le Pen acolytes; this should not be completely

discounted.  But assuming Hollande wins, I have heard the argument that this

event is already priced into the market. So will the rhetoric about

endangering the EU fade as political campaign promises often do?  Not on

your life.  With legislative elections upcoming on June 10th and June 17th,

the rhetoric is just beginning.  Those arguing against France’s

participation in the bailout fund and austerity as the path to growth will

be emboldened to speak even louder.  That, after all, will be the proven

path to winning a seat in the National Assembly of the Fifth Republic.

The Greeks

The Greeks have their own election on Sunday.  With massive unemployment,

there is hardly a reason to hold their elections on the weekend. Don’t these

people need something to do during the week or is that when the beaches are

less crowded?  From all reports, it looks like the coalition will survive by

the slimmest of margins. The rhetoric here too will build as their exit from

the EU remains the likely end game.  But if the coalition falls apart,

either on Sunday or near term, then the collapse of the EU is an immediate

fait accompli.

The Rhetoric

So the chatter will increase as the citizens of France, the Netherlands,

Italy, etc., continue to question with increasing authority and anger, why

they should labor under austerity programs in order to support the

irresponsible governments of Spain and Greece.  This will continue to

pressure the indices particularly as Spain and Italy continue coming to the

market to roll over their debt. At present, there is no avenue to growth and

Draghi seems unwilling to inject anymore stimulus into the markets until

governments put forth growth initiatives (and maybe, actually do cut

spending).

The Sequel

So this is the sequel to the Arab Spring as the Europeans rise up and say no

mas.  It is a more civilized uprising, as they perhaps torch candles instead

of themselves, but an uprising nonetheless. And then, in November, it will

be our turn.

Add to this the slowing US economy – yes, slowing, not a pause, and the EU

and China continuing to slow, and you have a rather poor outlook for US

equities.  But Brazil is the bright spot, isn’t it?  Nope. China is the

economic delta for Brazil.  We had an earnings season that few had expected

in terms of growth and outlook but the skepticism about the future is what

preys most acutely on the market, and, the economy.  Sure there are bargains

to be had but like most retailers, there is never one clearance price.  And

yes, Treasuries are fully valued and arguably in a bubble, but that’s been

the story for a while too.  I don’t know who is good picking bottoms and

tops so I’m staying low beta and fairly neutral.  There is very little

chance that under this scenario, allocators have a call to arms for

equities.  That will happen but not now. Not perhaps unless there is a

Romney victory and Europe puts forth some plans for growth.  I would

actually support a position that puts Greece in default, cuts back on

austerity in favor of responsible spending for growth  but I’ll leave my

daydreaming for when I’m at the chick flicks my wife occasionally drags me

to.

I continue to be short global cyclical stocks such as materials.  I hate

beta, except perhaps on the short side and bunting instead of the long ball.

As my favorite metals and mining analyst, Pete Ward, said to me yesterday,

“steel has very high barriers of exit.”

During your market respite, you may want to read an excellent new book: The Big Win.

http://www.amazon.com/The-Big-Win-Learning-Successful/dp/0470916109

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Oil: Why the Rally

My view on crude is that the move is a result of increasing tensions in the Middle East. Iran produces 4.3 mm bbl/day, almost 50% of Saudi Arabian capacity and has 13% of global reserves. Good opinion piece in WSJ today lays out why we should all fear the radical Iranian regime and be supportive of a pre-emptive strike even though this will spike crude prices further. Pay now or really pay later. Fear over war breaking out in Middle East over this issue driving fear factor in crude. From a demand standpoint, the slowing European economy will eventually pressure oil prices.

Natural Gas, Crude

California fired the regulators most responsible for limiting number of drilling permits – only 10% OK’d YTD.. KEG has 15% of fleet in CA and their business has been slow there. This should provide lift. Monterrey Shale estimated to have 15 billion barrels of oil. I added to KEG. Positive for OXY and PXP also.

Yesterday’s Blog – Nat Gas; Netflix (NFLX) Hastings Has A Solution for Europe; President Obama, Merkel,

My sources provided unique insights into the European Finance Ministers’ Meeting in Poland this past weekend:

Germany: I would like to invite Herr Geithner to our little party.

Poland: Whatever you say, boss.

Austria: Absolutely not. He has no personality and is way too American, always telling people what to do.

France: It’s a long trip and he probably won’t even come. He’ll probably just send a really big check as a gift with his regrets.

Belgium: Rubbish. I heard he’s in debt over his head and his boss is soon to be out of a job which means he’s also on borrowed time.

Germany: Look, I am paying for the party and I want him to come. Hopefully, he says nein and sends a check. If we don’t invite him we stand no chance of getting anything from him.

Austria: Fine. He’s your friend but I’m warning you that if he starts bossing us around, I won’t be able to hold my tongue.
And so it went.

NFLX continues to be a short, the CEO’s mea culpa aside, if for no other reason than content costs will significantly crimp margins. Perhaps the Europeans should look at Hastings strategy and separate insolvent Greece from the rest of the union, the Greeks being the NFLX version of a legacy DVD business. Apparently, Hastings doesn’t want his company’s valuation in the market to be painted with the broad brush of a declining or slower growth business so he is separating the 2 businesses. Perhaps Merkel et al should invite him to their next get together. At least he is sure to bring the entertainment.

So here I am in Nashville sitting at the gate waiting for my flight to Newark. CNN is on and everyone seems to be transfixed by the conversation leading up to the President’s speech on deficit reduction and taxes. I don’t think I have ever seen this level of interest before. Most have barely taken a bite of their deep fried bagels – everything is deep fried here, even the sushi. This is America, Nascar country as their attire attests, Dale Junior’s number featured prominently. I often wonder why they revere Junior given he’s crossed the finish line about as often as an Obama legislative proposal on taxes.

Like an Earnhardt fan, expectations were apparently incredibly high going into the weekend. But like an Earnhardt fan, the experience only resulted in disheartening disappointment. I’ve noted before that our two party system can’t agree on much these days so any expectation that the Euro’s 17 backers, some with effectively more than 2 party systems, will agree on a bailout measure for the banks and the PIIGS in a compressed time frame is folly.

Merkel is losing her mandate as yet another election pointed out this past weekend as her FDP partner suffered defeat. This conceivably puts Europe in a precarious position without a strong voice. Clearly, the coalition is fracturing, unable to even offer a carrot to the markets when they knew one was so desperately needed. Expectations are possibly higher for the FOMC to release a Q3 type statement on Weds. But even if they do, it will only provide a short term lift to the market for the economic fundamentals continue to worsen. Yes there are pockets of strength, the high end has been the savior, and the Apple ecosystem has done more than its share, but there is no disputing the declining economic picture and I would not continue to look for the upper end consumer to thrive, not in the face of higher taxes. Bullish prognosticators note the decline in the averages from the peak as more than having discounted any perceived economic malaise while hanging onto the belief that we are in a soft patch. Need I remind them that when the market rose to such heights, the global economy was on an upswing and the European sovereign mess just a twinkle in a dollar bull’s eye. Now the economy has slowed, if not reversed, and the collapse of the potential for a collapse of the Euro is real.

But the President has an answer for us. He wants to tax investment income as ordinary income, essentially removing any incentive for assumption of risk. In a perilous market environment, why put any capital at risk if there is little chance for reward? Less investment means less money sloshing around the economy and fewer jobs being created. And while we’re watching the acrimony in Washington, how about drafting the rest of us into a financial civil war, dividing the citizenry into two classes, pitting one against the other, all in the name of politics?

None of this is positive for the economy or the markets which is why I continue to be bearish

I added to my Euro short against the dollar on Thursday and still believe par is where the Euro will ultimately reside even if the new Troika comes out with a bailout package. Actually, that will further fortify my already strong conviction. Given my view on the slowing world economy – yes, even China will slow – I have exited my energy positions for the most part recalling that crude got decimated in the ’08 financial meltdown as demand suffered and speculative traders lost their appetite for risk (and their margin). The one bright spot is LNG as global demand is increasing sharply as a function of Japan and Germany using less nuclear power and Japan, China and India looking for a next generation solution to their burgeoning energy demands supposedly willing to pay as much as $20/btu all in. As more tankers and terminals are built for export, this will help sop up our overabundance of natural gas. And although I have little faith it will happen, should the administration ever propose a real energy policy, that, by the way would also create a number of jobs, natural gas would have to be in the equation.

I guess I’m not really surprised by the muted reaction in gold to all the negativity since gold is a risk asset and the appetite for risk is waning once again and margin requirements more lofty. It’s not a bad thing to see a high flying trade enter into a consolidation phase. I will keep my eye on it, looking for opportunity but will probably miss it again.


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