By training, I am not a feng shui master, but do follow few tricks over the years that work well for me. This year – the Year of Ox – commences on 26th Jan 2009 and ends on Feb 13, 2010.
History shows that Year of Ox wasn’t particularly friendly to us – in 1937 Fire Ox, we saw Japanese forces invade mainland China, Great Hong Kong typhoon kills an estimated 11,000 people, in 1967 Metal Ox, USSR tests a 58-megaton bomb – the largest man-made explosion, the Vietnam War officially begins, Berlin Wall goes up, in 1973 Water Cow, US involvement in the Vietnam War ends, Ferdinand Marcos becomes President for Life of the Philippines, Arab countries double the price of oil to US#3.07/bbl, triggering a world-wide recession and l985 Wood Ox with an 8.1-magnitude earthquake kills at least 9,000 in Mexico City, US becomes a debtor nation for the first time since 1914, of course, Malaysia launches the Proton Saga – its first ‘national car’ and closer to time – the Fire Ox of the 1997/98 Asian financial crisis - the landscape was not any better.
Feng Shui is all about the energy flows – ensuring the good stuff flows in and the bad vibes are blocked. The economy outlook in many countries are going through upheavals of sorts and furthermore it’s unlikely that Wealth gains are in store for us this year. When times are bad and options are running out fast, a little bit of Feng Shui magic is no harm to everyone, if it helps to protect your Wealth and enhance it this Earth Ox year.
The most auspicious Wealth area in the home or office is in the Southeast. So whip out your regular compass to ascertain this positive location. Do position water in the southeast to help absorb money. If you can afford to spend little more, some masters would recommend gold carp, Chinese coins and golden ox.
West, the North, the Northeast and the East are areas that needed to be cured with Feng Shui. As a general rule, always keep your home and office spacious, clean and orderly to maintain good Wealth Feng Shui.
The kitchen is one of the most important areas of the home because it is the location of the Fire Mouth, or source of Wealth. The energy in your kitchen should be clean and pleasant for the best gains in terms of Wealth luck. Therefore even if you don't spend much time in your kitchen, keeps the energy flow going with some crystal enhancers. Crystals are said to be able to cleanse a location from bad influences and negative energy. Choose crystals with Wealth luck symbolism and put these items on your kitchen countertop for the best enhancement.
Tuesday, February 24, 2009
Monday, February 23, 2009
Bear Markets Bonanza
History does repeat itself, but it almost never duplicates itself. You might be wonder where this statement leads you to, rite? Understand the truth to this statement leads us to have: An Open Mind!
Key challenge this year is to not to get caught in herd-like behaviour. It never makes you lasting money. To the contrary, it is and will always be – the single biggest and most common mistake investors make, and it costs you loads of money and missed opportunities. The key to understanding it, in my humble opinion, is what the healing process is.
We have the most oversold conditions ever in almost major stock indices and we have most historic oversold conditions on record in almost all natural resources. Any nearly everyone agrees, including me, that there are more losses to come, but the markets are never straightforward with us. Now, it seems a common catch-phrase to hear the saying ‘It is going to get worse before it gets better’ everywhere in almost every financial newsletter on the planet today. That’s how human behaviour works and deeply oversold conditions can lead to massive, surprising, out-of-the blue rallies.
In 1974/75 recession, a 45% collapse in the Dow in just two years’ time, the Dow turned back up in early 1975, rallying more than 75% by September 1976 even while slow economic growth lasted for another two years.
In 1990/92 recession, stocks once again hammered largely due to S&L crisis and the Dow soaring 40% from 2,365 to 3,310 in just over two years – even though the underlying fundamental economic indicators did not turn back up until late 1996.
The apocalyptic warnings were coming out everywhere in 1997/98 Russian and Asian financial crisis. Yet, just one short year later, by 1999, stocks were at or reaching new record highs!
Even if we go back as far back as the 1929 Great Stock Market crash, it was followed by a massive 48% rally between the Dow’s November 1929 low and April 1930, when stocks turned lower again.
Investors have been flocking to US Treasury bonds, but I am seeing another bubble to be created, and without one shred of doubt in my mind, the US Treasury is the most dangerous and riskiest market on the planet right now and will send giant shock waves throughout the world and that capital has to go somewhere, rite?
As the currency devaluation process taking place, I see that natural resources to have intrinsic value. The action of the US dollar is absolutely pathetic under these circumstances.
Key challenge this year is to not to get caught in herd-like behaviour. It never makes you lasting money. To the contrary, it is and will always be – the single biggest and most common mistake investors make, and it costs you loads of money and missed opportunities. The key to understanding it, in my humble opinion, is what the healing process is.
We have the most oversold conditions ever in almost major stock indices and we have most historic oversold conditions on record in almost all natural resources. Any nearly everyone agrees, including me, that there are more losses to come, but the markets are never straightforward with us. Now, it seems a common catch-phrase to hear the saying ‘It is going to get worse before it gets better’ everywhere in almost every financial newsletter on the planet today. That’s how human behaviour works and deeply oversold conditions can lead to massive, surprising, out-of-the blue rallies.
In 1974/75 recession, a 45% collapse in the Dow in just two years’ time, the Dow turned back up in early 1975, rallying more than 75% by September 1976 even while slow economic growth lasted for another two years.
In 1990/92 recession, stocks once again hammered largely due to S&L crisis and the Dow soaring 40% from 2,365 to 3,310 in just over two years – even though the underlying fundamental economic indicators did not turn back up until late 1996.
The apocalyptic warnings were coming out everywhere in 1997/98 Russian and Asian financial crisis. Yet, just one short year later, by 1999, stocks were at or reaching new record highs!
Even if we go back as far back as the 1929 Great Stock Market crash, it was followed by a massive 48% rally between the Dow’s November 1929 low and April 1930, when stocks turned lower again.
Investors have been flocking to US Treasury bonds, but I am seeing another bubble to be created, and without one shred of doubt in my mind, the US Treasury is the most dangerous and riskiest market on the planet right now and will send giant shock waves throughout the world and that capital has to go somewhere, rite?
As the currency devaluation process taking place, I see that natural resources to have intrinsic value. The action of the US dollar is absolutely pathetic under these circumstances.
Sunday, February 22, 2009
FX Outlook for 2Q09
Data flows are still ugly and growth expectations are now in a suitably negative place. Policy makers have used up a lot of fiscal and monetary bullets and are still staring at deep and prolonged recession.
The biggest risk for USD is still monetization through official bond buying. It changes psychological of market and open to constant testing on whether it is in, how large the intervention and so on, and it also kills price discovery in a bellwether market, undermining many other signals the Fed values including inflation expectations.
The EUR discussion, on the other hand, centres on whether the real sector adjustment becomes so wrenching that the costs of the withdrawal from the EUR gets serious consideration. The fears that the EUR may tear itself up from the inside will live on through 2009, along with concern about the sustainability of national fiscal accounts. It constitutes a very limited payoff for stubborn ECB anti-inflation policies and relative fiscal constraint, and will put the region at a distinct disadvantage.
Until global trade returns to the fore, it strikes harder at the European core as economic activity is redrawn along national lines as consumer demand to be hammered on a more durable basis and protectionist pressures will steadily build. This is more obviously challenging for economies with greater trade opening, like Singapore, Hong Kong, Taiwan and to some extent of Malaysia, whose whole raison d’etre is trade.
Japan has very powerful reasons for preparing for FX intervention on a huge scale against the rising JPY. The MoF is ready to go, perhaps by early-mid Q2 and on the background, US may encouraging intervention to recycle Japanese surplus savings back to the US. However, any JPY sell-off is unlikely to last long. Repatriation by Japanese life insurers, which may be larger than usual as they suffer losses on equity investments and need to realize the profits, will also support JPY toward fiscal year-end. Also, Japan has a stimulus package of $720 billion – roughly 14% of GDP.
Commodity currencies, while at one hand is yet to feel the full-blast of the cold winds coming from the global downturn, I still think commodity economies are getting close to the end of the rate easing cycle.
My base case for structural appreciation of RMB remains for no change, and is could be a possibility that PBOC will target a stable currency in order to deter a further rise in capital outflows. The credit growth will remain strong as the government disburses funds related to the stimulus package at full speed, banks will likely to increase their matching loans to large infrastructure projects that have (implicit or explicit) government guarantee.
The biggest risk for USD is still monetization through official bond buying. It changes psychological of market and open to constant testing on whether it is in, how large the intervention and so on, and it also kills price discovery in a bellwether market, undermining many other signals the Fed values including inflation expectations.
The EUR discussion, on the other hand, centres on whether the real sector adjustment becomes so wrenching that the costs of the withdrawal from the EUR gets serious consideration. The fears that the EUR may tear itself up from the inside will live on through 2009, along with concern about the sustainability of national fiscal accounts. It constitutes a very limited payoff for stubborn ECB anti-inflation policies and relative fiscal constraint, and will put the region at a distinct disadvantage.
Until global trade returns to the fore, it strikes harder at the European core as economic activity is redrawn along national lines as consumer demand to be hammered on a more durable basis and protectionist pressures will steadily build. This is more obviously challenging for economies with greater trade opening, like Singapore, Hong Kong, Taiwan and to some extent of Malaysia, whose whole raison d’etre is trade.
Japan has very powerful reasons for preparing for FX intervention on a huge scale against the rising JPY. The MoF is ready to go, perhaps by early-mid Q2 and on the background, US may encouraging intervention to recycle Japanese surplus savings back to the US. However, any JPY sell-off is unlikely to last long. Repatriation by Japanese life insurers, which may be larger than usual as they suffer losses on equity investments and need to realize the profits, will also support JPY toward fiscal year-end. Also, Japan has a stimulus package of $720 billion – roughly 14% of GDP.
Commodity currencies, while at one hand is yet to feel the full-blast of the cold winds coming from the global downturn, I still think commodity economies are getting close to the end of the rate easing cycle.
My base case for structural appreciation of RMB remains for no change, and is could be a possibility that PBOC will target a stable currency in order to deter a further rise in capital outflows. The credit growth will remain strong as the government disburses funds related to the stimulus package at full speed, banks will likely to increase their matching loans to large infrastructure projects that have (implicit or explicit) government guarantee.
Thursday, February 19, 2009
Commodities – In Money
Commodities may be down, but they are not out – and they shouldn’t be out of your portfolio, either. Even with oil prices down more than 75% from their record high set in July08, producers are operating near maximum capacity every day with 89.5 million barrels a day, and we are using 89 million barrels a day. That essentially means there is no excess capacity any where. If you factored in war, routine maintenance of pipelines or refining facilities, and diminishing supplies, we are probably already running at a deficit, even though current data does not reflect that. There is a very high probability that in the near future demand will outrun supply. I do think it is the investing opportunity of our lifetime.
There is a big different between being alarmist and being prepared and in this case, we are talking about the latter, especially when it comes to potential profits.
China, among other countries, is using its huge currency reserves – and the financial weakness of rivaling other global players – to lock up long-term supplies of commodities. The average American uses two times the amount of oil used by each European, four times the amount used by each Japanese consumers, 12 times their counterparts in China and 30 times the amount used by the typical consumer in India.
Even if substitutes were found tomorrow, we still have to replace trillions of dollars worth of manufacturing and infrastructure processes that have to be changed completely. Some studies that I have seen suggest that oil is used in more than 60,000 manufacturing processes and it is much the same with water, in particular.
It reminds me of comments made by Jim Rogers, not too long ago, when the legendary investor observed that ‘real commodity assets represent real wealth’. I agree, and I hope you will, too.
There is a big different between being alarmist and being prepared and in this case, we are talking about the latter, especially when it comes to potential profits.
China, among other countries, is using its huge currency reserves – and the financial weakness of rivaling other global players – to lock up long-term supplies of commodities. The average American uses two times the amount of oil used by each European, four times the amount used by each Japanese consumers, 12 times their counterparts in China and 30 times the amount used by the typical consumer in India.
Even if substitutes were found tomorrow, we still have to replace trillions of dollars worth of manufacturing and infrastructure processes that have to be changed completely. Some studies that I have seen suggest that oil is used in more than 60,000 manufacturing processes and it is much the same with water, in particular.
It reminds me of comments made by Jim Rogers, not too long ago, when the legendary investor observed that ‘real commodity assets represent real wealth’. I agree, and I hope you will, too.
Wednesday, February 18, 2009
Diesel is Back!
Diesels are loud, dirty and smelly – a pollution nightmare… you can hear a diesel truck from a mile away, see the soot from halfway down the block and smell the exhaust as it rolls by.
Surprise! – those diesels you hear, and smell are antiques, thanks to the new technology.
Europeans have to pay heavy gasoline taxes and just in case the hydrogen car hit a snag, they invested in the diesel engine as a stop-gap, and indeed, as you know, the hydrogen DID hit a snag and the stop-gap looks like a winner in the great auto race. European refineries have removed most of the pollutants from the fuel. While it is true that the engines cost more, but the gas savings almost make up the difference. You see, diesel gets about 30% more miles to the gallon than gasoline, and those savings are real, in any kind of driving conditions. What’s more, people who worry about global warning prefer diesel because it emits up to 20% less carbon dioxide.
Diesel’s biggest edge is something you’d never expect ….you don’t need crude oil to make diesel fuel. You can make it from coal, plant matter or even cooking oil. No kidding – a restaurant can invest in a cooking oil converter kit that lets you fry a batch of potatoes and later reuse the oil in your delivery truck.
In India, they make fuel from cow dung as an important energy source. A new use for sacred cows!
An MIT study predicts that the diesel hybrid could outperform a hydrogen fuel cell engine on both gasoline mileage and carbon emissions – within 10 years. The obvious play is to buy the big automakers like Toyota that own the leading hybrid or diesel technologies.
Surprise! – those diesels you hear, and smell are antiques, thanks to the new technology.
Europeans have to pay heavy gasoline taxes and just in case the hydrogen car hit a snag, they invested in the diesel engine as a stop-gap, and indeed, as you know, the hydrogen DID hit a snag and the stop-gap looks like a winner in the great auto race. European refineries have removed most of the pollutants from the fuel. While it is true that the engines cost more, but the gas savings almost make up the difference. You see, diesel gets about 30% more miles to the gallon than gasoline, and those savings are real, in any kind of driving conditions. What’s more, people who worry about global warning prefer diesel because it emits up to 20% less carbon dioxide.
Diesel’s biggest edge is something you’d never expect ….you don’t need crude oil to make diesel fuel. You can make it from coal, plant matter or even cooking oil. No kidding – a restaurant can invest in a cooking oil converter kit that lets you fry a batch of potatoes and later reuse the oil in your delivery truck.
In India, they make fuel from cow dung as an important energy source. A new use for sacred cows!
An MIT study predicts that the diesel hybrid could outperform a hydrogen fuel cell engine on both gasoline mileage and carbon emissions – within 10 years. The obvious play is to buy the big automakers like Toyota that own the leading hybrid or diesel technologies.
Monday, February 16, 2009
East Europe – Ready for Round 2 Financial Crisis
If anything that could be the time-bomb to my optimism to market, it will be the unfolding drama from the Eastern Europe. I have written at least two articles related to this region, and I believe this debacle is big enough to shatter the fragile banking systems of Western Europe and potentially to set off round 2 of our financial crisis.
Last week, Austria’s finance minister Josef Proll made frantic efforts to put together E150 billion rescue for the ex-Soviet bloc, as his banks have lent some E230 billion to the region, equal to 70% of Austria’s GDP. The Vienna press said Bank Austria and its Italian owner Unicredit face a ‘monetary Stalingrad’ in the East, but the interestingly part of this episode is that Germany’s Peer Steinbruck said this is not our problem and we will see about that.
Some statistics suggest that Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities and it must roll-over some $400 billion this year, and that equal to a third of the region’s GDP. We know jolly well that the credit window has slammed shut. Not even Russia can easily cover the $500 billion debts of its oligarchs while oil remains near $33 a barrel. Russia has bled some 36% of its foreign reserves since August defending the rouble. This is the longest run on a currency in history.
In Poland, 60% of mortgages are in Swiss Francs. Hungary, the Balkans, the Baltics and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime. And the crucial difference, however, European banks are on hook for both.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50% more leverage, according to statistics from the IMF.
Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and there is no EU Federal Reserve yet ready to act as a lender of last resort – a German-Dutch veto – and the Maastricht Treaty.
Under a “Taylor Rule’, the ECB already needs to cut rates to zero and to make matter worse, banks are pulling back, undercutting subsidiaries in East Europe. The sums needed are beyond the limits of the IMF, which already has bailed out Hungary, Ukraine, Latvia, Belarus, Iceland and Pakistan – Turkey could the next candidate and is fast exhausting its own $200 billion reserve. It wouldn’t surprise me if the IMF has to resort to printing money for the world, using arcane powers to issue SDRs.
If Deustche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt and the implications are obvious, as the lethal brush fires move closer. Are the firemen ready?
Last week, Austria’s finance minister Josef Proll made frantic efforts to put together E150 billion rescue for the ex-Soviet bloc, as his banks have lent some E230 billion to the region, equal to 70% of Austria’s GDP. The Vienna press said Bank Austria and its Italian owner Unicredit face a ‘monetary Stalingrad’ in the East, but the interestingly part of this episode is that Germany’s Peer Steinbruck said this is not our problem and we will see about that.
Some statistics suggest that Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities and it must roll-over some $400 billion this year, and that equal to a third of the region’s GDP. We know jolly well that the credit window has slammed shut. Not even Russia can easily cover the $500 billion debts of its oligarchs while oil remains near $33 a barrel. Russia has bled some 36% of its foreign reserves since August defending the rouble. This is the longest run on a currency in history.
In Poland, 60% of mortgages are in Swiss Francs. Hungary, the Balkans, the Baltics and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime. And the crucial difference, however, European banks are on hook for both.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50% more leverage, according to statistics from the IMF.
Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and there is no EU Federal Reserve yet ready to act as a lender of last resort – a German-Dutch veto – and the Maastricht Treaty.
Under a “Taylor Rule’, the ECB already needs to cut rates to zero and to make matter worse, banks are pulling back, undercutting subsidiaries in East Europe. The sums needed are beyond the limits of the IMF, which already has bailed out Hungary, Ukraine, Latvia, Belarus, Iceland and Pakistan – Turkey could the next candidate and is fast exhausting its own $200 billion reserve. It wouldn’t surprise me if the IMF has to resort to printing money for the world, using arcane powers to issue SDRs.
If Deustche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt and the implications are obvious, as the lethal brush fires move closer. Are the firemen ready?
Sunday, February 15, 2009
The Great Oil Hoax
I cannot really vouch for the right of this story – but it was told to me, and sounds scary, if it gets to us. So, there is no reward of proving me wrong, but it can be disastrous, if you ignore it.
The story goes something like this – Arab Saudi’s oil supply is running dry fast and we cannot count on them to the rescue. To add credence to this, the story was told to me by this guy, who knows the energy business and he once told the senior US administration that the Saudi doesn’t have anything near the oil reserves they claim. And the oil production is about the drop sharply. If the charges are true – we could be facing oil at above US$100 per barrel and gasoline above US$8 a gallon or more. It is as simple as that!
Of course, if you listen to government officials, intelligence agencies, and even powerful Wall Street financers, they tell you the opposite. They say the Saudis could quickly double their oil production from the current level if they wanted to.
Americans used to run Aramco, the huge oil company that manages the Saudi fields. But in 1979, the Saudis booted it out and took over. Since then, the Saudis started keeping a secret. Experts try to figure out how much oil the Saudis sell by monitoring tanker traffic in and out of the world’s port. And that is how little we know for sure.
Since the take-over, their figures for proven reserves kept going up and up – even though they didn’t find any major new oil fields! In 1979, the Saudis adjusted proven reserves upwards by 50 billion barrels. Then eight years after that, their proven reserves magically grew by another 100 billion barrels. Their estimated reserves increased by 150% in nine years – to a total of 260 billion barrels and they didn’t find a single major new oil field!
For the last 17 years, they have claimed they own 260 billion barrels of proven oil in the ground. The figure never goes down, even though they have pumped out 46 billion barrels during that period. As recently as 2004, they claimed their reserve estimates are actually conservative. Trouble is – we’ve got no proof except they say so. If it were true, we wouldn’t have a thing to worry, but what if it is not.
Before Aramco was taken over in 1979, they told Congress that Saudi Arabia had proven reserves of 110 billion barrels. If that is true, about half of that has been used up since then.
Otherwise, it is a devious plan, and it has worked perfectly well until now. Or perhaps, everyone in OPEC does it as well. In the 1980s, OPEC’s claim of total reserves magically leaped from 353 to 643 billion barrels without a single major discovery. Industry experts call it the quota war, because the ability of each member of the cartel to sell number of barrels of oil is based on each member’s oil reserves!
It seems that everyone is claiming to have a bottomless well.
The story goes something like this – Arab Saudi’s oil supply is running dry fast and we cannot count on them to the rescue. To add credence to this, the story was told to me by this guy, who knows the energy business and he once told the senior US administration that the Saudi doesn’t have anything near the oil reserves they claim. And the oil production is about the drop sharply. If the charges are true – we could be facing oil at above US$100 per barrel and gasoline above US$8 a gallon or more. It is as simple as that!
Of course, if you listen to government officials, intelligence agencies, and even powerful Wall Street financers, they tell you the opposite. They say the Saudis could quickly double their oil production from the current level if they wanted to.
Americans used to run Aramco, the huge oil company that manages the Saudi fields. But in 1979, the Saudis booted it out and took over. Since then, the Saudis started keeping a secret. Experts try to figure out how much oil the Saudis sell by monitoring tanker traffic in and out of the world’s port. And that is how little we know for sure.
Since the take-over, their figures for proven reserves kept going up and up – even though they didn’t find any major new oil fields! In 1979, the Saudis adjusted proven reserves upwards by 50 billion barrels. Then eight years after that, their proven reserves magically grew by another 100 billion barrels. Their estimated reserves increased by 150% in nine years – to a total of 260 billion barrels and they didn’t find a single major new oil field!
For the last 17 years, they have claimed they own 260 billion barrels of proven oil in the ground. The figure never goes down, even though they have pumped out 46 billion barrels during that period. As recently as 2004, they claimed their reserve estimates are actually conservative. Trouble is – we’ve got no proof except they say so. If it were true, we wouldn’t have a thing to worry, but what if it is not.
Before Aramco was taken over in 1979, they told Congress that Saudi Arabia had proven reserves of 110 billion barrels. If that is true, about half of that has been used up since then.
Otherwise, it is a devious plan, and it has worked perfectly well until now. Or perhaps, everyone in OPEC does it as well. In the 1980s, OPEC’s claim of total reserves magically leaped from 353 to 643 billion barrels without a single major discovery. Industry experts call it the quota war, because the ability of each member of the cartel to sell number of barrels of oil is based on each member’s oil reserves!
It seems that everyone is claiming to have a bottomless well.
Thursday, February 12, 2009
You Say ‘Depression’, I Say ‘….’
No bells have been rung nor any fat ladies sung. Equity market rallies since Obama-day and it reflects both hope for his stimulus package and 1950's-style valuations between equities and bonds. Anything short of Armageddon for the corporate sector over the next twelve months is likely to be greeted with relief. Meanwhile, in an address to a banking group in Hawaii on Friday, San Francisco Fed President Janet Yellen didn’t mince her words, urging legislators to wrap up debate on a stimulus package and pass the legislation.
The IMF's MD Strauss Khan has described the advanced economies as being in depression. However, since the slump on Inauguration Day, the equity markets of the advanced economies have rallied: the S&P by 8%, DJ EURO STOXX by 6% and FTSE100 by 5%. The less advanced also: the Chinese CSI by 10% and Brazil by 15%.
I believe that the direction of travel is right; the timing will, as always, be a matter of finer judgment.
The Fed uses parity (of the forward PER) as a guide to fair value. On that measure, current values of equity markets would represent fair value if they were anticipating earnings declines over the next year of almost 40% on the S&P and around 70% on each of the FTSE100 and DJ EURO STOXX. If EPS declines prove less severe then, on this measure at least, further equity rallies could be justified. They would have to go a long way before Bernanke worried about "irrational exuberance"!
Governments now across the globe have provided funds to banks, taken shareholdings in them and appear to stand ready to provide greatly more funds including by way of quantitative easing (printing money). Otherwise, banks hold back, unemployment, corporate and personal bankruptcies all rise. As they rise, the banking sector is likely to become more, not less, risk averse. That's the vicious circle!
President Obama has taken a lead in setting a cap on packages to banking execs of $500k. We are seeing an extremely weak employment report, which portends very depressed levels of economic activity and consumer spending in particular in coming months, but from the market perspective, bonds were unable to forge significantly higher ground, instead capitulating to the downside as stocks got the upper hand.
Among some analysts that I know, there is a view that the worst is behind us now, as economic data has fallen off so rapidly in the last quarter that the pace is likely to slow or even flatten in the coming months though by the same token, that’s not likely to cause the Obama administration to take its foot off the pedal in terms of its efforts to rejuvenate the economy.
The IMF's MD Strauss Khan has described the advanced economies as being in depression. However, since the slump on Inauguration Day, the equity markets of the advanced economies have rallied: the S&P by 8%, DJ EURO STOXX by 6% and FTSE100 by 5%. The less advanced also: the Chinese CSI by 10% and Brazil by 15%.
I believe that the direction of travel is right; the timing will, as always, be a matter of finer judgment.
The Fed uses parity (of the forward PER) as a guide to fair value. On that measure, current values of equity markets would represent fair value if they were anticipating earnings declines over the next year of almost 40% on the S&P and around 70% on each of the FTSE100 and DJ EURO STOXX. If EPS declines prove less severe then, on this measure at least, further equity rallies could be justified. They would have to go a long way before Bernanke worried about "irrational exuberance"!
Governments now across the globe have provided funds to banks, taken shareholdings in them and appear to stand ready to provide greatly more funds including by way of quantitative easing (printing money). Otherwise, banks hold back, unemployment, corporate and personal bankruptcies all rise. As they rise, the banking sector is likely to become more, not less, risk averse. That's the vicious circle!
President Obama has taken a lead in setting a cap on packages to banking execs of $500k. We are seeing an extremely weak employment report, which portends very depressed levels of economic activity and consumer spending in particular in coming months, but from the market perspective, bonds were unable to forge significantly higher ground, instead capitulating to the downside as stocks got the upper hand.
Among some analysts that I know, there is a view that the worst is behind us now, as economic data has fallen off so rapidly in the last quarter that the pace is likely to slow or even flatten in the coming months though by the same token, that’s not likely to cause the Obama administration to take its foot off the pedal in terms of its efforts to rejuvenate the economy.
Wednesday, February 11, 2009
Who offers best deal?
Geither’s ‘plan’ to fix the banking system seems to be little different than the failed plans of late-2008. The clarity was beyond one of confidence that insolvency is an increasingly reasonable presumption to make about the banks. The market already gave a heavy thumb down to the Geither’s plan. Media reports of the four program sizes suggest the new plan will be financed using the remaining TARP funds. Deservedly so and perhaps it is time to stop fidgeting with confidence gadgets and get down to some old-fashioned work, otherwise, it will end up as a cold toast, indeed. The books need to be opened, prices – some necessarily obtained – need to be matched with assets. Some banks would survive, some will need to be sold, perhaps to the
Quintupling the size of the program to 1 trillion from the initial $200 billion suggests that this program will work ultimately, but it takes time and the market seems to be hoping for more clarity than was provided thus far.
On the hand, Singapore Exchange (SGX) has unveiled 28 securities for the first batch of extended settlement (ES) contracts that begin trading on February 20. Most of the securities are component stocks of the Strait Times Index.
An ES contract is a margin-based product that allows investors to buy into an underlying stock at the transacted price on the day of the trade without paying the full amount upfront. Investors could buy a stock at a margin that ranges between 5-20% of the cost and they have up to 38 days to settle the deal, which is 35 days longer than for normal securities investments. Of course, the risk is that if its 5x leverage, or 20% down, it could be a possibility that the shares might not be picked up as losses are more than 20% deposit prior to T+38 and this will cause a slanted risk being borne by the broking houses and remisiers.
At the same time, I am seeing greater potential in
My view – this succinctly tell you why
Tuesday, February 10, 2009
Emotional Discharge in Crisis
We have yet to run the full course of emotional discharge that accompanies crisis. Although, we're getting closer to doing so but judging from the level of anger building over compensation, golden parachutes, corporate jets and more corporate malfeasance, it remains a challenge.
Key question is that what's it going to take to get back on track?
At this stage of the game, there are a lot of things, but most of them are distractions. The real issue is that banks continue to refuse to lend money to consumers who so desperately need it and who just bailed their greedy rear ends out of hock.
I don't want to wrap up on a sour note which is why I remind you that recessions are filled with opportunities particularly for those companies with solid financial resources.
MasterCard Inc. (MA) reported better-than-expected fourth-quarter earnings, surprising some analysts given the tightened credit market. For the quarter, the world's second-largest credit card network earned $243 million, or $1.87 a share, and boosted its revenue by 14.2% to $1.2 billion, Reuters reported. Warren Buffet's Berkshire Hathaway Inc. (BRK.A, BRK.B) is investing 3 billion Swiss francs ($2.6 billion) in Swiss Reinsurance Co.
It is becoming clearer for direction of the US dollar. As I watch the $900 billion stimulus bill wind its way through Congress, knowing this will be piled atop the estimated 2009 deficit of $1.19 trillion. Truth be told, recent market developments have already provided a warning - though I'm not altogether certain that message has been received.
The world is struggling between two basic schools of thought i.e. with a call for the government to stimulate the economy with massive amounts of money so that we can enhance and increase consumer demand. This is where Mr. Bernanke and President Obama's advisors reside. And on the other hand, we have a proponent for the government to step-back and let the invisible cleansing hand of the market wash away the debt before any real economic growth can again take hold in the economy, championed by Irving Fisher.
So, from a currency perspective I think it means this: We will be locked in a sustained period of risk aversion (rising unemployment, deflation, and sovereign debt defaults) as this crisis plays out. And in a world of major risk aversion, that mantle rests at the feet of the world reserve currency — the U.S. dollar.
The best advise to give now is that it's a way to insure that you continue to invest, even when the markets stink. There are many different kinds of risk, however – including the risk of getting left behind. Long-term, most of the growth that's expected in the decades to come will be outside
Monday, February 9, 2009
Euro: Taking No Comfort
The late Milton Friedman famously predicted that the euro would not pass their first economic crisis. The euro, or so the argument went, was doomed from the outset because of the wide spread in economic performance and discipline amongst the member countries. At one hand, we have the highly disciplined but slow growing economies of Germany and the Netherlands and on the other extreme, we have the faster growing but poorly disciplined countries such as Spain and Greece. As the icing to the cake, we also have countries that lack in both departments such as Italy, which make it difficult for the union to ‘gel’ well.
On the spirit of global uncertainty, the recession dynamics are already firmly entrenched, in a context of declining corporate investment and steep labour market deterioration. The deterioration of the labour market has just started in some countries of the Eurozone and the worst is still ahead.
The European approach, at least until now, has been to save the banking system at any cost. A larger part of European debt has to be financed externally and unless there is a material improvement in market conditions, re-financing at such as a massive (estimated more than US$1.5 trillion) is simply a challenge. It is possible that a significant share of the re-financing cost will find its ways to the sovereign balance sheet, ultimately to the tax-payer, and the slow normalization of the credit market will keep a larger fraction of the monetary stimulus not to be fully passed to the final consumers.
I am particularly concern about the widening interest rate differentials between member countries in the Eurozone with regard to the solidity of the single-currency area. This certainly has raised the risk of a collapse of monetary union quite considerably. All these challenges are surfacing as the global economy faces the worst year since World War II. I am becoming increasingly convinced that most of us are underestimating how long it will take to get the global economy firmly back on its feet again.
Another issue, which is potentially even more destabilizing for the euro longer term is the massive liabilities facing Europe as its population ages. Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050, if the current pension and social security program is left unchanged. The Greek government is painfully aware of this and was passing one of those new laws, which caused the riots in Athens before Christmas.
The problem, as I have already alluded to, is poor discipline amongst several of the member states. Ever heard of the four PIGS? These economies are often considered the ‘anti-dote’ to the BRIC countries. This less than flattering acronym stands for Portugal, Italy, Greece and Spain – which are all in much deeper trouble than they are prepared to admit.
On the spirit of global uncertainty, the recession dynamics are already firmly entrenched, in a context of declining corporate investment and steep labour market deterioration. The deterioration of the labour market has just started in some countries of the Eurozone and the worst is still ahead.
The European approach, at least until now, has been to save the banking system at any cost. A larger part of European debt has to be financed externally and unless there is a material improvement in market conditions, re-financing at such as a massive (estimated more than US$1.5 trillion) is simply a challenge. It is possible that a significant share of the re-financing cost will find its ways to the sovereign balance sheet, ultimately to the tax-payer, and the slow normalization of the credit market will keep a larger fraction of the monetary stimulus not to be fully passed to the final consumers.
I am particularly concern about the widening interest rate differentials between member countries in the Eurozone with regard to the solidity of the single-currency area. This certainly has raised the risk of a collapse of monetary union quite considerably. All these challenges are surfacing as the global economy faces the worst year since World War II. I am becoming increasingly convinced that most of us are underestimating how long it will take to get the global economy firmly back on its feet again.
Another issue, which is potentially even more destabilizing for the euro longer term is the massive liabilities facing Europe as its population ages. Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050, if the current pension and social security program is left unchanged. The Greek government is painfully aware of this and was passing one of those new laws, which caused the riots in Athens before Christmas.
The problem, as I have already alluded to, is poor discipline amongst several of the member states. Ever heard of the four PIGS? These economies are often considered the ‘anti-dote’ to the BRIC countries. This less than flattering acronym stands for Portugal, Italy, Greece and Spain – which are all in much deeper trouble than they are prepared to admit.
Thursday, February 5, 2009
Who Got Hit Worst?
As the US recession is reaching out to the rest of the world, many wonder which countries that more vulnerable to a crisis and painful adjustment.
My sense is that Eastern Europe will top the list of emerging market regions susceptible to a full-blown financial crisis. This is because this region is heavily dependent on external financing and high current account deficits. And with the sharp drop-off in capital inflows to continue this year and strong presence of foreign banking presence, which long hailed as a strength, now increasingly looks like a potential weakness and may possibly trigger a regional domino effect. Estonia and Lithuania seem to be headed down the same path like Latvia due to strong build up of external debt and fixed exchange rate and may be forced to turn to the IMF for help. Fitch put Latvia’s financing needs at around 400% of end-2008 foreign exchange reserves, 350% for Estonia and 250% in Lithuania.
Oil exporters like Russia and several GCC countries are now also facing a reversal in their fiscal and current account balances, which are shifting into deficit territory. Savings from the oil boom will now be drawn to support growth and in many cases to help the corporate and financial sectors pay off their large foreign debts accrued during the boom years. Dubai corporates have been in particularly hard hit by the credit crunch and their exposure to the domestic property markets.
Off the GCC countries, the UAE has the highest short-term debt relative to forex reserves, which leaves it to be highly vulnerable. As a share of total external debt, UAE’s short term is expected to rise to 72.5% in 2009. Kuwait is also vulnerable with its banks struggling to find new sources of finance, as some have already suffered some defaults. The safest among all is the Saudi Arabia with its ample reserves, conservative investment strategy and well-capitalized banking system.
Turning to Asia, China is unlikely to be at risk, but its economic indicators continue to be weak and its liabilities are on the rise. China needs to boost consumption, alleviating domestic and global imbalances and overcapacities by reducing its saving rate and a stronger RMB in real terms, but it will not happen overnight, especially with an estimated 20 million job losses, but these are part of China’s future trajectory.
My sense is that Eastern Europe will top the list of emerging market regions susceptible to a full-blown financial crisis. This is because this region is heavily dependent on external financing and high current account deficits. And with the sharp drop-off in capital inflows to continue this year and strong presence of foreign banking presence, which long hailed as a strength, now increasingly looks like a potential weakness and may possibly trigger a regional domino effect. Estonia and Lithuania seem to be headed down the same path like Latvia due to strong build up of external debt and fixed exchange rate and may be forced to turn to the IMF for help. Fitch put Latvia’s financing needs at around 400% of end-2008 foreign exchange reserves, 350% for Estonia and 250% in Lithuania.
Oil exporters like Russia and several GCC countries are now also facing a reversal in their fiscal and current account balances, which are shifting into deficit territory. Savings from the oil boom will now be drawn to support growth and in many cases to help the corporate and financial sectors pay off their large foreign debts accrued during the boom years. Dubai corporates have been in particularly hard hit by the credit crunch and their exposure to the domestic property markets.
Off the GCC countries, the UAE has the highest short-term debt relative to forex reserves, which leaves it to be highly vulnerable. As a share of total external debt, UAE’s short term is expected to rise to 72.5% in 2009. Kuwait is also vulnerable with its banks struggling to find new sources of finance, as some have already suffered some defaults. The safest among all is the Saudi Arabia with its ample reserves, conservative investment strategy and well-capitalized banking system.
Turning to Asia, China is unlikely to be at risk, but its economic indicators continue to be weak and its liabilities are on the rise. China needs to boost consumption, alleviating domestic and global imbalances and overcapacities by reducing its saving rate and a stronger RMB in real terms, but it will not happen overnight, especially with an estimated 20 million job losses, but these are part of China’s future trajectory.
Will Cash handouts work?
Many countries are trying it.
Japan’s FY08 second supplementary budget, which was passed in January 27, 2009 included a provision for JPY2 trillion in cash handouts of JPY12,000 per person.
Taiwan also attempted with a variant of cash handouts with everyone in Taiwan will be given more than 100 US dollars in shopping vouchers in a government bid to boost the economy amid the global credit crisis. The programme would cost some 82 billion Taiwan dollars, while those people who donated their coupons would be able to file for tax deductions.
Australia unveils a new stimulus package, promising 42 billion Australian dollars ($26 billion) in spending that will send the budget into the red for the first time in nearly a decade. Among of it, direct payment of up to $950 to individuals and household and one-off cash payments from the government focusing on the lower-middle income households. Among of the key measures - the $950 Single Income Family Bonus to support 1.5 million families with one main income earner, the $950 Farmer's Hardship Bonus paid to around 21,500 drought affected farmers and farm dependent small business owners, the $950 per child Back to School Bonus to support 2.8 million children from low- and middle-income families etc.
And many more countries, including Malaysia will go for this option as the conditions worsen further. To me, this is the speediest way to stimulate the economy, but the opposition will claim that the cash handout scheme could be meaningless in terms of Ricardian equivalence.
In the Japan’s Regional Promotion Tickets distributed in spring 1999, of which totaled 20,000 yen for every household with children aged 15 or under and elderly person, study by the Cabinet Office suggests that the consumption did increase, mainly in clothes and other semi-durable goods. The marginal propensity to consume (MPC) rose from 0.18 to 0.3. About 35% of the distributed funds was used for consumption.
And the case of Taiwan, preliminary study shows that the coupon program will add 0.64% to GDP. Based on the latest surveys, 46% of the respondents said they used their benefit to repay debt, 31% said they saved it and 41% said they spent it, mostly on daily essentials.
Traditional methods like tax cuts, infrastructure spending etc might work, but it has quite a lag effect. Perhaps, it is the high time for government of Malaysia to think out-of-the-box in coming up with innovative ways in the expected second stimulus package soon.
Japan’s FY08 second supplementary budget, which was passed in January 27, 2009 included a provision for JPY2 trillion in cash handouts of JPY12,000 per person.
Taiwan also attempted with a variant of cash handouts with everyone in Taiwan will be given more than 100 US dollars in shopping vouchers in a government bid to boost the economy amid the global credit crisis. The programme would cost some 82 billion Taiwan dollars, while those people who donated their coupons would be able to file for tax deductions.
Australia unveils a new stimulus package, promising 42 billion Australian dollars ($26 billion) in spending that will send the budget into the red for the first time in nearly a decade. Among of it, direct payment of up to $950 to individuals and household and one-off cash payments from the government focusing on the lower-middle income households. Among of the key measures - the $950 Single Income Family Bonus to support 1.5 million families with one main income earner, the $950 Farmer's Hardship Bonus paid to around 21,500 drought affected farmers and farm dependent small business owners, the $950 per child Back to School Bonus to support 2.8 million children from low- and middle-income families etc.
And many more countries, including Malaysia will go for this option as the conditions worsen further. To me, this is the speediest way to stimulate the economy, but the opposition will claim that the cash handout scheme could be meaningless in terms of Ricardian equivalence.
In the Japan’s Regional Promotion Tickets distributed in spring 1999, of which totaled 20,000 yen for every household with children aged 15 or under and elderly person, study by the Cabinet Office suggests that the consumption did increase, mainly in clothes and other semi-durable goods. The marginal propensity to consume (MPC) rose from 0.18 to 0.3. About 35% of the distributed funds was used for consumption.
And the case of Taiwan, preliminary study shows that the coupon program will add 0.64% to GDP. Based on the latest surveys, 46% of the respondents said they used their benefit to repay debt, 31% said they saved it and 41% said they spent it, mostly on daily essentials.
Traditional methods like tax cuts, infrastructure spending etc might work, but it has quite a lag effect. Perhaps, it is the high time for government of Malaysia to think out-of-the-box in coming up with innovative ways in the expected second stimulus package soon.
Tuesday, February 3, 2009
Get Ready for Big Swing
The S&P 500 lost close to 9% last month – the worst January on record. If we annualized it, this could mean a full-year loss for the market of about 75%. The big question right not is whether we will go even lower than that.
The worst two bear markets in the S&P 500 both occurred in the 1930s – (i) from 1929-1932 which sending stocks down 86% and (ii) between 1937 and 1938 – which producing a 54% loss from peak to trough.
In current cycle, the S&P 500’s November low was 752, which translated to a peak-to-trough loss of 52%. This qualifies the current downturn to be the third worst in modern stock market history, though not as bad as either of the Great Depression bears.
We have to be mindful that this decline took just 13 months and typically, a market loss of 40% would take about 21 months. So, the speed of the decline was a typically fast. It practically erased every single penny of the 2002-2007 bull market’s advance.
While I would not discount the possibility that things could get much worse, one thing that I am very sure is that when the carnage is over, you can expect swift and substantial gains from being little bit of less risk adverse. On average, the first year of a bull market has produced a gain of 46% for the S&P 500 and for the average 57 months ahead, the average bull market produces an overall gain of 164%.
While the world’s leaders gathered at Davos, Switzerland are blaming one another for their economic woes last week, the odd of investing now into building a diversified portfolio of quality companies and those that pursuing dollar-cost averaging strategies throughout this downturn, I believe, are still very likely for a solid return.
The worst two bear markets in the S&P 500 both occurred in the 1930s – (i) from 1929-1932 which sending stocks down 86% and (ii) between 1937 and 1938 – which producing a 54% loss from peak to trough.
In current cycle, the S&P 500’s November low was 752, which translated to a peak-to-trough loss of 52%. This qualifies the current downturn to be the third worst in modern stock market history, though not as bad as either of the Great Depression bears.
We have to be mindful that this decline took just 13 months and typically, a market loss of 40% would take about 21 months. So, the speed of the decline was a typically fast. It practically erased every single penny of the 2002-2007 bull market’s advance.
While I would not discount the possibility that things could get much worse, one thing that I am very sure is that when the carnage is over, you can expect swift and substantial gains from being little bit of less risk adverse. On average, the first year of a bull market has produced a gain of 46% for the S&P 500 and for the average 57 months ahead, the average bull market produces an overall gain of 164%.
While the world’s leaders gathered at Davos, Switzerland are blaming one another for their economic woes last week, the odd of investing now into building a diversified portfolio of quality companies and those that pursuing dollar-cost averaging strategies throughout this downturn, I believe, are still very likely for a solid return.
Monday, February 2, 2009
The future is not frightening
We just experienced a once in a lifetime credit market bubble and we are clearly in a serious recession and more aggressive action is needed to turn things around. However, I am optimistic about the choices that President Obama has made for his economic team and the whole world is working together to address unemployment, possibly that we can end the recession by early 2010.
Given the economic uncertainty, it is natural to expect investors to be too worried to buy equities.
Let me it in the most simplistic way that I can of what I see as our future. Investment opportunity is always the difference between the reality and the perception. And, in my humble opinion, since many equities are priced as though a depression might be on the way, many of them are attractively priced.
Cost pressures have eased as prices of raw materials have declined sharply since hitting peak levels in mid-2008. By and large, I would say that we are in between the phases of asset reflation under fiscal stimulus and USD secular depreciation. I believe the arguments of going defensives are becoming less convincing.
My reading of the tea leaves in the investment newsletter arena suggests that we should bet on the optimists. That's because the select few market timing newsletters that have beaten a buy-and-hold over the long term are, on average, more bullish on the stock market right now than the much bigger group of newsletters whose market timing has lagged a buy-and-hold. On the theory that the past's winners are more likely to be right than the past's losers, this bodes well for the stock market.
Having said that, there are no guarantees in this business, especially when it comes to picking a bottom.
On a separate note, thanks to declining demand, airfares aren't marching higher, hotel room rates are falling and cruise lines are slashing prices. But what do all the great deals matter if you're too worried about your finances to shell out for a trip? Isn't it ironic. This is a great year to travel -- if you can afford it.
A friend recently purchased a transatlantic trip -- 14 days in an outside cabin with a balcony -- for $800 per person. And that includes the food.
Given the economic uncertainty, it is natural to expect investors to be too worried to buy equities.
Let me it in the most simplistic way that I can of what I see as our future. Investment opportunity is always the difference between the reality and the perception. And, in my humble opinion, since many equities are priced as though a depression might be on the way, many of them are attractively priced.
Cost pressures have eased as prices of raw materials have declined sharply since hitting peak levels in mid-2008. By and large, I would say that we are in between the phases of asset reflation under fiscal stimulus and USD secular depreciation. I believe the arguments of going defensives are becoming less convincing.
My reading of the tea leaves in the investment newsletter arena suggests that we should bet on the optimists. That's because the select few market timing newsletters that have beaten a buy-and-hold over the long term are, on average, more bullish on the stock market right now than the much bigger group of newsletters whose market timing has lagged a buy-and-hold. On the theory that the past's winners are more likely to be right than the past's losers, this bodes well for the stock market.
Having said that, there are no guarantees in this business, especially when it comes to picking a bottom.
On a separate note, thanks to declining demand, airfares aren't marching higher, hotel room rates are falling and cruise lines are slashing prices. But what do all the great deals matter if you're too worried about your finances to shell out for a trip? Isn't it ironic. This is a great year to travel -- if you can afford it.
A friend recently purchased a transatlantic trip -- 14 days in an outside cabin with a balcony -- for $800 per person. And that includes the food.
Sunday, February 1, 2009
Super Contango in Oil
I bet not many people heard of this term. In case, if you are not familiar with the term, it denotes a normal and very specific condition associated with future contracts, in which the price of oil for distant delivery months from now exceeds the price of oil being traded right now on the spot market. Typically, the price difference is related to the cost of storing and insuring the oil itself.
I know many investors have given up on oil, fearing that a fall from grace precludes a rise in price from the ashes. In this piece, I am showing that the oil markets are right now in a rare state of ‘super contango’, which suggests that the markets expect far higher prices by later part of this year and next year.
On Tuesday, oil traded at $38.81 a barrel NYMEX spot. With storage cost of 90 cents per barrel per month, under normal market conditions, I would expect the June crude oil contracts to be priced roughly $43.31. However, the June contract at NYMEX was settled at %52.14 on the day with an excess potential profit of $8.83.
In general, the spreads we’re seeing now are at, or near, their highest levels since April 2004, when the government started collecting Cushing data. Cushing is the delivery point of all NYMEX futures. It signals an arbitrage opportunity that’s literally too good to pass up if you have got the means to capitalize on it.
It won’t be surprise to see tanker rates to skyrocket as companies literally top off very large crude carriers with the 2 million gallons they’re designed to carry – and then park them offshore until prices rise. Since January 1, the benchmark supertanker rental rates have risen more than 56%. As many as 80 million barrels of crude oil are being stored at sea around the globe, according to Frontline Ltd, the world’s largest owner of supertankers.
In the meantime, they’re selling the June futures and locking in profits above and beyond what it costs them to buy and store their stash of the ‘black gold’. According to recent reports by Bloomberg News, Phibro LLC, the commodity trading arm for Citigroup has booked two supertankers to hoard crude oil supplies. It would not be surprise to see Morgan Stanley, which owns half of tanker group operator Heidmar and Goldman Sachs, which executes commodities trades and structures related deals through J.Aron & Co to run in packs.
I know many investors have given up on oil, fearing that a fall from grace precludes a rise in price from the ashes. In this piece, I am showing that the oil markets are right now in a rare state of ‘super contango’, which suggests that the markets expect far higher prices by later part of this year and next year.
On Tuesday, oil traded at $38.81 a barrel NYMEX spot. With storage cost of 90 cents per barrel per month, under normal market conditions, I would expect the June crude oil contracts to be priced roughly $43.31. However, the June contract at NYMEX was settled at %52.14 on the day with an excess potential profit of $8.83.
In general, the spreads we’re seeing now are at, or near, their highest levels since April 2004, when the government started collecting Cushing data. Cushing is the delivery point of all NYMEX futures. It signals an arbitrage opportunity that’s literally too good to pass up if you have got the means to capitalize on it.
It won’t be surprise to see tanker rates to skyrocket as companies literally top off very large crude carriers with the 2 million gallons they’re designed to carry – and then park them offshore until prices rise. Since January 1, the benchmark supertanker rental rates have risen more than 56%. As many as 80 million barrels of crude oil are being stored at sea around the globe, according to Frontline Ltd, the world’s largest owner of supertankers.
In the meantime, they’re selling the June futures and locking in profits above and beyond what it costs them to buy and store their stash of the ‘black gold’. According to recent reports by Bloomberg News, Phibro LLC, the commodity trading arm for Citigroup has booked two supertankers to hoard crude oil supplies. It would not be surprise to see Morgan Stanley, which owns half of tanker group operator Heidmar and Goldman Sachs, which executes commodities trades and structures related deals through J.Aron & Co to run in packs.
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