IN THE OIL PATCH

From Bloomberg, oil bankruptcies are up in the quarter to levels last seen in 2009. Employment in the industry has taken the hit. According to Bloomberg, citing the FRBD report, 70,000 jobs disappeared since the industry peaked in October 2014.

Bankruptcies among oil and gas companies have reached quarterly levels last seen in the Great Recession, according to the Federal Reserve Bank of Dallas. At least nine U.S. oil and gas companies that accounted for more than $2 billion in debt have filed for bankruptcy in the fourth quarter, the bank said Wednesday in its energy economic update for the final three months of the year.

 Meanwhile, some believe, citing a Goldman Sachs report earlier this year, that oil will have to fall below $20 a barrel to meaningfully affect supply significantly to change the current glut on the market. If that happens expect more bankruptcies. 

Some corners of the energy world dismissed Goldman Sachs’ prediction earlier this year that crude oil prices might fall below $30 per barrel. But no longer. The investment bank reiterated its belief that oil prices may need to fall to $20 per barrel in order to force a significant volume of supply off the market, and such a scenario is no longer seen as a remote possibility. U.S. oil production has only declined moderately thus far, down about 300,000-500,000 barrels per day since peaking at 9.6 million barrels per day (mb/d) in April 2015. But with so many drillers barely hanging on, everyone is still pumping as much oil as possible in order to keep the lights on, delaying the inevitable adjustment in supply. “This rebalancing is far from achieved,” Goldman concluded this week.

The investment bank says that only prices plummeting to $20 per barrel will force a much greater volume of oil offline, a necessary development to balance oil markets. That would be extremely painful for individual drillers and for the economies (local, state and national) that depend on oil revenues, but without such a severe drop in prices, the oil markets could endure a more damaging prospect – a protracted supply overhang, which could end up being much worse for all those concerned. For now, the world is still producing somewhere around 1.5 mb/d more than it needs. 

Capital markets have shunned some of the most indebted drillers, but access to finance remains open for investment-grade oil drillers. In this context, unless oil prices drop another $10 to $15 per barrel, Goldman says, the necessary contraction may not take place quick enough.

oilprice.com/Energy/Energy-General/Will-Goldman-Be-Right-After-All.
 
 

 

WATCH THE MOVE

 
There is something called the MOVE index.

Simply put, it's the bond equivalent to what the VIX is for equities, a gauge of volatility. Since volatility for many represents fear, both the MOVE and the VIX are fear indices. Fear moves markets. And fear moves equity and bond prices.

If you think not check out last week's turmoil in high yield bonds after Third Avenue sprung it situation on investors and shut down redemption privileges so it could liquidate their fund in an orderly way. It's their definition of orderly not your or mine.

Last week's long awaited Fed action--will they or won't they hike prices on money and, if so, how often and how steeply--was about uncertainty. And uncertainty is a pseudonym for fear. Last week ahead of the Fed's announcement, the MOVE hit 79.57, a two month high, according to the WSJ.

Part of Yellen's message was about confidence, the job market signaled to her and her fellow bankers at the Fed, the economy was stable enough to hike rates 25 basis points with projections for as many as four rate hikes separated by reasonable intervals in 2016. Again, keep in mind, it's their definition of reasonable not your or mine.

When interest rates rise, bond prices go down. What also goes up but few are discussing is government debt services. A five year bond has a five year fixed rate of servivce. Governments finance much of their spending by floating debt. So the MOVE is also an important gauge about fluctuations in the money market.

When a corporation or government sells bonds it's borrowing money, not much different from you or I borrowing money to buy a car or house. There's a term, interest rate and payments. The same holds true for banks,savings and loans, if any of those are still around, and credit unions when they float CDs.

A week later the MOVE traded at 66.37. So what's the message? Mostly likely that traders or investors given the global economic outlook, a rather gloomy one outside the U.S., doesn't think Yellen's plan will see full fruition.  And that's a proxy for what and how they think the economy will do.

THERE IS A RHYTHM FOR THOSE WHO CAN HEAR IT

The tug of war between the bears and the bulls is an ongoing saga. Here's a piece from MarketWatch,

"This ‘smart money’ indicator nailed the dot-com bust, and it’s even more bearish now." 

Let's first say a word about what we like to do, though this is not investment advice for anyone nor is it intended to be construed as such. It's what we like to do and we take ownership when we do.

Sell out of the money calls and buy out of the money puts, sometimes deep out of the money puts. Now indicators are just that, indicators. Like life, but don't try to tell this to politicians and bureaucrats, there are no guarantees.

They tell you in school one of the objects of investing your hard earned capital is to provide money for firms to create growth and jobs. And so in part it is. But firms oftentimes find ways to waste that capital. (Sorry, but we just have to add this, as do politicians and bureaucrats!) No hard feelings here, just caveats have their function. 

The real object is to make money: Making money for your retirement, for your kid's education, so you can someday get off the time card cycle, so you can perhaps start your own business or so you can just set it aflame and just watch it burn. Forget that at your own peril. Never let anyone shame you into thinking that is un-American.

You don't always make money because things go up. You can make some by protecting yourself when they go down. Both have their costs and their risks.

 

“Smart money” is betting against the bulls in a huge way.
When it comes to investing in the stock market, the crowd is often wrong at extremes. A contrarian’s delight. This, according to Dana Lyons of J. Lyons Fund Management, is not one of those times. At least, if history is any indication. Of course, that’s a pretty big “if.”
Nevertheless, it’s worth noting what’s going on with the traders of S&P 100 options OEX, +0.73%

“Historically, this group has been on the right side of the market more times than not when their collective options position is at an extreme,” Lyons wrote in a blog post in which he pointed out that OEX traders have never held more put options relative to call options.
By the numbers, Friday’s readings marked the first time in history with more than three put options for every call. The record didn’t last long. On Monday, it rose to 3.3 options for every call.
This chart shows just how rare these kinds of extremes have been. To put it in perspective, between 1999 and 2014, the reading broke past two puts for every call just 15 days.

Like one of our favorite boxing sayings: There is a rhythm for those who can hear it.

marketwatch.com/story/this-smart-money-indicator-nailed-the-dot-com-bust-and-its-even-more-bearish-now-2015-12-22 

 

TEAR MANUFACTURERS

 One of the things you learn over time if you're paying attention is centralized governments--especially heavily statist ones--have an inbuilt penchant for producing tears. In most cases delayed tears.

As many of you know Argentina just held an important election to toss out one tear manufacturer in what hopefully for the Argentinian people won't be another. Argentina might be the global capitol of tears. It's a distinction that few claim to want, but many continue to vie for. Greece and some other parts of the EU should come to mind.

In a recent article former Pimco guru Mohmed El-Erian writes:

Last week, the government of newly elected Argentine President Mauricio Macri launched a bold plan to revitalize a bruised and beleaguered economy plagued by high inflation. At a time of daunting crisis conditions, one should not underestimate the importance of this move not just for Argentina, but also for other countries, where leaders are watching closely for clues about how to deal with their own economic woes. 

Thanks to years of economic mismanagement, Argentina’s economy has been badly underperforming for decades. Previous governments sought to avoid difficult policy choices and obfuscate fundamental issues by implementing inefficient controls that grossly misallocated resources and undermined Argentina’s ability to generate the foreign-exchange earnings needed to cover its import bill, resulting in domestic shortages. The recent drop in commodity prices has exacerbated the situation, depleting what little growth dynamism the economy had left, while fueling inflation, deepening poverty, and spreading economic insecurity and financial instability. 

You have to chuckle, perhaps even give El-Erian points for politeness. Describing Argentina's long standing economic woes as mismanaged is stand-up comic material.  Bruised and beleaguered are other interesting choices. But oh well. Here are some points he offers to correct the problems.

The other thing is, any scent of a meaningful move toward less statism could spell investing  opportunities. There are caveats, however, so keep your eyes focused. That way you might avoid getting caught up in any future tears because if past is prologue.......

In theory, governments in such a situation have five basic options to contain crisis conditions, pending the effects of measures to reinvigorate growth and employment engines.

· Run down the financial reserves and wealth that were accumulated when the economy was doing better.

· Borrow from foreign and domestic lenders.

· Cut public-sector spending directly, while creating incentives to induce lower private-sector expenditure.

 · Generate revenues through higher taxes and fees, and earn more from abroad.

· Use the price mechanism to accelerate adjustments throughout the economy, as well as in trade and financial interactions with other countries. More:

project-syndicate.org/commentary/argentina-macri-economic-action-plan-by-mohamed-a--el-erian-2015-12

LOOKS, SOUNDS AND SMELLS SAME

It's a long read but one worth it if you seek to understand the Fed and its inner workings.

You also get a glimpse of its expansionary financial muscles at work. The author tactfully uses the term aggrandizement. The Fed is like that giant sucking sound we've all heard about, sucking up more and more financial terrain in its growing regulatory efforts to be all in one and one in all.

Here are some excerpts.

In recent quarters, I’ve remained adamant that the immediate first step of the Federal Reserve in normalizing monetary policy should have been to reduce the size of its balance sheet. The Fed’s failure to prioritize that first step, in the apparent desire to maintain an aggrandized role in the U.S. financial markets, has significantly increased the risk of a collapse from the speculative extremes the Fed has created in recent years. Given the increasing risk-aversion evident in market internals, we doubt that even a reversal of last week’s rate hike would materially reduce that prospect.

To see why, it’s important to understand how the Federal Reserve’s tools - open market purchases, interest on reserves, and reverse repurchases - actually work in affecting the economy and the behavior of speculative investors.

Let’s begin with open market operations. Traditionally, the Fed has used open market purchases of Treasury securities in order to affect short term interest rates. The Fed’s transactions don’t really accomplish this by directly pressuring market prices higher and lower. Instead, the Fed has traditionally determined the level of short-term interest rates by determining the quantity of zero-interest money that must be held across the economy as a whole.

Specifically, when the Fed goes out and buys a Treasury bond from the public, it pays for that bond in the form of currency and bank reserves (known as “base money” or “monetary base”). The bond becomes an asset on the Fed’s balance sheet, and the base money is a liability of the Fed. As a reminder that currency is a liability of the Fed, look at one of the pieces of paper in your wallet that reads “Federal Reserve Note.” The same is true for bank reserves. Bank reserves are deposits that banks have with the Federal Reserve. They are assets to the banks, and liabilities to the Fed.

In short, when the Fed makes open market purchases of government bonds, it takes those bonds on as assets, and creates new liabilities in the form of currency and bank reserves.
 .....
Moreover, as we should have learned from the global financial crisis, when the Fed holds interest rates down for so long that investors begin reaching for yield by speculating in the financial markets and making low-quality loans, the entire financial system becomes dangerously prone to future crises. If the Fed's mandate is really to support long-runemployment and price stability, the first priority of Congress should be to rein in this cycle of activist Fed intervention; to end the Fed's ability to promote yield-seeking speculation and malinvestment that only produces inevitable crises and weakens long-run U.S. economic prospects.

 The fact is that a quarter-point hike comes too late to avert the consequences of years of speculation, and while the hike itself will have little economic effect, the timing is ironic because a recession is already likely. The main effect of a rate hike will be to add volatility to an already speculative and now increasingly risk-averse market. The Fed’s real policy error, as it was during the housing bubble, was to hold interest rates so low for so long in the first place, encouraging years of yield-seeking speculation and malinvestment by doing so.
 ......

advisorperspectives.com/commentaries/20151214-hussman-funds-deja-vu-the-fed-s-real-policy-error-was-to-encourage-years-of-speculation 

INFLATION: IT'S HOW YOU MEASURE IT

A recent article in the fiscal times, "11 things that will cost more in 2016," starts:

You don’t have to be an economist to know that wages haven’t changed much over the past decade. Most Americans only need to look at their paycheck for proof. 

That stagnation, combined with a strong dollar and low oil prices, has helped keep a cap on the prices that we pay for goods and keep inflation at historically low rates for the past few years.

The first paragraph, though clearly understated, is true. You don't have to be an economist. If you have a pulse beat, you qualify.  The second paragraph is just plain misinformation. Inflation isn't at historically low rates. But how it gets measured is. And energy prices have been up and down over the last decade. Here's a chart we've posted before on commodity prices in general during that decade. The chart speaks for itself.

The author goes on to list the 11 things that will cost more in 2016. The first one, surprise, surprise, is healthcare. The second one is homes and the third tuition, all three of which are intimate parts of what once was the American dream.

So one could postulate that inflation has and will only go up for those foolish enough to still believe in the American middle class dream. Number four is another interesting one since it is in many ways  something those hopeful home buyers seek to avoid, rent. Here's the rest of the list in numerical order, five through 11. Girl scout cookies; food in general; airfare; hotels; and, yes, money, since it ain't free; bitcoin; and the last one, one we should most not accept, the price of the 2016 election.

Now all the items on that long list are not necessarily those of daily use, but many, for many Americans, use them quite frequently.


















Here's another chart to show how renters fared versus wages over that decade. Those low wages didn't seem to hold rents in check much. For at least seven of the 10 years rents increased and in most of those seven years they increased dramatically, well above those flat or stagnant wages.

To be fair, the fiscal times published a companion list of 10 things that will cost less in 2016. Check it out and see how many you plan to either use or to buy. Computers, bonds; drones; airfare, owing to, as the article cites, cheaper energy prices; gold; iPhones; heating costs; and antiques.

If there's any one out there who believes this is some sort of fair trade off--one of Sir Alan Greenspan's huge fantasies he tried to propagate during his reign of bubble mania at the Federal Reserve,we hope, in honor of the latest Star Wars release, the Force blesses you.

And by the way, holding interest rates artificially below their natural level--the natural level has to do with price discovery, something you'll never see with a market-intrusive Fed--low interest rates themselves cause inflation.