Jump to content

Something more sinister going on?


Cardboard
 Share

Recommended Posts

While most if not all here are fully aware of the large and sharp decline in oil recently, it seems that copper is also on the way to weakness as well trading below $3 a pound. Coal was the first to go down and now it seems that gold and silver are catching a solid bid. What all this means?

 

Back in 2008/2009, all commodities went down due to global demand weakness. Gold and silver also went down since they were considered as a "source" of cash or liquidity for players facing cash needs or margin calls.

 

I am just wondering if this whole commodity debacle is not a sign of things to come in 2015, namely a global recession. Japan is already in recession, China is slowing down and who knows what the real GDP number is, Europe is neutral at best and some U.S. numbers are weak lately, although I think it will muddle through. We can also remember from 2008/2009 how global things are now so inter-connected and correlated.

 

While I am a value investor and that is why I got trapped into some kind of value trap with my oil stocks  :'( and generally avoid macro calls, I am thinking that gold and silver this time around could be a pretty good hedge against insanity or for what could be a terrible year in 2015. The reason being that this solid bid that we are seeing is in the face of rapidly declining commodities.

 

After a brutal sell-off, precious metals are not going down anymore, but heading up. I am thinking that investors now feel what will be the response to a global recession and it will be money printing or QE on a massive scale. This was unknown in 2008/2009, but now with interest rates still near zero and with the previous crisis response, what else to expect? Could they still be a source of liquidity and head down at first or with the recent bear, are most institutions and hedge funds out of it, so they would not apply selling pressure this time around?

 

Apple stock is another one that worries me. It is huge and looks like it is correcting. The FXI is also something else that I am watching. Finally, this oil correction has been so sharp, dramatic and unexpected that I am worried that the next financial crisis will also come as a surprise and be shocking. Should we prepare?

 

Cardboard

Link to comment
Share on other sites

Wouldn't lower commodity prices be a good thing?  I'm not complaining about paying less for my gas at the pump.

 

Agreed, why are lower input prices a bad thing?  It might shake out a few weak players, but overall for the economy paying less would be good.

 

Wall St has this tendency to make anything that isn't the status-quo bad.  So commodity prices low, if they go high it's bad.  If they're high and go low it's bad.  Doesn't make sense.

Link to comment
Share on other sites

30-year Treasury bonds are well under 3%.  You just don't get much in the way of returns when long-term rates are under 3%.  I don't know why people keep debating where multiples should be when rates are that low.  Multiples should be below average.

 

Something to think about if you are a US investor:  Not only were stocks up over 10%, but the dollar was up over 10%, interest rates are down and the price of oil has plummeted.  The purchasing power increase of stock owners has been incredible this year.

 

Trying to time the market is hard but I can't see why anyone would buy SPY up here.  You'd be better off in high grade corporate bonds. 

Link to comment
Share on other sites

While most if not all here are fully aware of the large and sharp decline in oil recently, it seems that copper is also on the way to weakness as well trading below $3 a pound. Coal was the first to go down and now it seems that gold and silver are catching a solid bid. What all this means?

 

Back in 2008/2009, all commodities went down due to global demand weakness. Gold and silver also went down since they were considered as a "source" of cash or liquidity for players facing cash needs or margin calls.

 

I am just wondering if this whole commodity debacle is not a sign of things to come in 2015, namely a global recession. Japan is already in recession, China is slowing down and who knows what the real GDP number is, Europe is neutral at best and some U.S. numbers are weak lately, although I think it will muddle through. We can also remember from 2008/2009 how global things are now so inter-connected and correlated.

 

While I am a value investor and that is why I got trapped into some kind of value trap with my oil stocks  :'( and generally avoid macro calls, I am thinking that gold and silver this time around could be a pretty good hedge against insanity or for what could be a terrible year in 2015. The reason being that this solid bid that we are seeing is in the face of rapidly declining commodities.

 

After a brutal sell-off, precious metals are not going down anymore, but heading up. I am thinking that investors now feel what will be the response to a global recession and it will be money printing or QE on a massive scale. This was unknown in 2008/2009, but now with interest rates still near zero and with the previous crisis response, what else to expect? Could they still be a source of liquidity and head down at first or with the recent bear, are most institutions and hedge funds out of it, so they would not apply selling pressure this time around?

 

Apple stock is another one that worries me. It is huge and looks like it is correcting. The FXI is also something else that I am watching. Finally, this oil correction has been so sharp, dramatic and unexpected that I am worried that the next financial crisis will also come as a surprise and be shocking. Should we prepare?

 

Cardboard

 

I also got value trapped in some smaller oil names. =(

This is definitely an interesting way to think about it. I have no idea what's going on macro but i feel like we've been up from 2009 from easing and everyone's talking about how the market is overvalued and how a correction is due. The drop in oil prices might be the catalyst that starts the global recession.

Link to comment
Share on other sites

Drop in oil prices is mainly due to higher demand. It does not signal anything. You have to consider that price is a function of supply and demand. Assuming it is demand that is weak everywhere paints a very incomplete picture. Same with copper and coal. Coal usage is up, prices are so low because of oversupply, which will be shaken out.

Link to comment
Share on other sites

I am just wondering if this whole commodity debacle is not a sign of things to come in 2015, namely a global recession.

 

It just feels like a great depression for those who own oil stocks.

 

And coal stocks, and copper, and iron, and timber, and corn, and etc.

 

This isn't limited to a single commodity - almost seems like a majority of them are well within correction territory. My guess there is a problem with aggregate demand...and it won't end soon. If im wrong, I have heavy exposure to commodities through Altius. If I'm right, I have heavy deflation protection through Fairfax.

Link to comment
Share on other sites

"Could it be the Fairfax thesis starting to play out?"

 

Well, that is exactly my point. While I agree that lower commodity prices are a boost to the consumers and to many industries, it still points to lower current demand. Also to my knowledge, it is not all commodities that are supposedly trending toward surplus production, but they are all going down except for precious metals.

 

Also, have you guys checked the U.S. 10 year treasury yield move? It is not showing any upward movement as you would expect of a Fed that is supposed to tighten up next year and who has stopped its QE program. The yield is actually heading down. All these signs point to a global economy that is slowing down.

 

My fear is that having suffered deeply from oil & gas equities, that I will suffer from a 2nd wave that could come even more unexpectedly than this one.

 

Cardboard

Link to comment
Share on other sites

I tend to think the move down does signal global weakness. The Central Banks are trying to fight deflation, and appear to be losing the battle. I think Watsa's thesis plays out over time. Cheaper oil being an economic boon is a glass half full perspective. There is a flip side to that coin that people are less likely to acknowledge. 

Link to comment
Share on other sites

When the 70's oil supply shock (Arab oil embargo) came and oil zoomed up, there was an unprecedented capital investment to drill and extract oil. The world became awash with oil and until recently oil was in doldrums.

 

The new commodity demand shock from China (with prices going exponentially starting 2004) caused a similar effect. The commodity co's loaded up on debt and spent capital like drunken sailors. We'll go back to 2004 price levels (WTI @~40, ) and settle down. in the meantime, the debt laden co's will go bankrupt, commodity etn, funds will go under. A bulk of US citizens don't own or own little stocks. They'll get the benefit of lower commodity prices and start spending. A new resurgence will propel non-commodity stocks.

 

The issue with China is that, the Chinese central bank is like 1929 Fed. They may not have the tools/policy/mechanism to prop things up. They'll have a steep learning curve.

 

In the end, the commodity firms will fail to return above cost of capital.

 

RIO Vs S&P (until 2004)

https://www.google.com/finance?chdnp=0&chdd=0&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1085169600000&chddm=1771653&chls=IntervalBasedLine&cmpto=NYSE:RIO&cmptdms=0&q=INDEXSP:.INX&ntsp=0&ei=VtWIVJnZM9GtsQfW34GwAQ

 

 

After 2004:

https://www.google.com/finance?chdnp=0&chdd=0&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1418253745909&chddm=1152897&chls=IntervalBasedLine&cmpto=NYSE:RIO&cmptdms=0&q=INDEXSP:.INX&ntsp=0&ei=VtWIVJnZM9GtsQfW34GwAQ

 

 

Link to comment
Share on other sites

Net/net, you have hit on exactly what I have started to think about; how what is happening in the oil market could morph into the larger economy. Lots of things swirling around at the same time; harder than normal to make sense of it all. Perhaps time to focus on 'return of capital' and not just 'return on capital'.

Link to comment
Share on other sites

Could it be the Fairfax thesis starting to play out?

 

Yes just in the wrong country. Prem's thesis is right for China not the US. A consumer credit bubble does not produce deflation because you can't fire your wife or your children. A business/financial credit bubble produces deflation. United States bailed out the banks and the businesses never had a lot of debt so no deflation. Chinese businesses and banks have a lot of debt right now and this will result in deflation.

 

Over the last 20 years Chinese businesses hollowed out a large part of American industry. The remaining businesses are ones where the Chinese don't have a competitive advantage since if they did the businesses would already be gone. So Chinese can lower labour costs all they want and American workers and companies will be largely unaffected. I would argue that Chinese deflation will in fact be good for the United States since business will have even fatter profit margins due to a cheaper Chinese supply chain. The basic fact is that the world has been experiencing the deflationary impact of China for the last 20 years. We are already good at coping with it.

Link to comment
Share on other sites

Those charts above seem to say it all.  Demand is about 90 M Barrels/day which equates to roughly 1.6 Trillion less spent on oil at $60 versus 110/bbl if oil stayed down for a year. 

 

That is a huge stimulus program for the world economy excepting Saudi et al, and Russia. 

 

So a few facts to counter the hysteria:

1) Oil demand is not decreasing, yet.

2) Oil supply is not materially increasing.  What needs to be drilled to keep up is costing alot more than it used to.  Choose a number - no one really knows.

3) Several mid stream oil producers in NA have already announced cuts to drilling and exploration programs. 

4) Alternate energy cant grow fast enough in the next while to materially displace oil, yet.

5) An economic boom will use more oil.  Even Teslas batteries will need oil to be built, and oil to charge them up for the time being. 

6) Lower prices are going to bankrupt a significant number of over leveraged oil cos operating in the shale/deep water/tar sands arenas.  No one is going to bail them out, and alot of operators will retrench for awhile. 

 

At some point fairly soon supply is going to come down quickly and prices will start to go back up. 

 

Oil has always operated on a tight cycle, and has always been prone to panics.  It is not related to other commodities where the build cycle is in decades.  Refineries can ramp up and down in days.  Projects can be suspended instantly with marginal extra cost to the producer.  New projects take a few months to build out.  The guys who suffer permanent damage are the over leveraged, and the drill suppliers. 

 

Rukawa's comments about China make alot of sense to me. 

 

Link to comment
Share on other sites

Guest 50centdollars

Anyone think this drop in oil prices was orchestrated purposely to get the world economies growing again? Will this get the world economies growing again as the average person will now spend less on energy costs?

Link to comment
Share on other sites

Anyone think this drop in oil prices was orchestrated purposely to get the world economies growing again? Will this get the world economies growing again as the average person will now spend less on energy costs?

 

It's my personal belief that Saudi Arabia orchestrated the lower oil prices for the following reasons:

 

1) It's a shot at Iran.  Maybe putting pressure on Iran will entice them to give up their nuclear program.

 

2) ISIS has been selling oil.  I believe that is where they have been getting the majority of their profits.  Lower oil profits means less money for them and may weaken their base.  SA is certainly no friend of ISIS and it must scare the shit out of them to think that Iran is on one side and ISIS is on the other.

 

3) To a lesser degree, this hurts Russia and shale producers.  If this takes out some of the supply then it's icing on the cake.

 

I would be interested in hearing other's thoughts about the above?  Does anyone get anything from Stratfor?  I would be curious their take on this whole thing.

 

Thanks,

 

AtlCDore

Link to comment
Share on other sites

Anyone think this drop in oil prices was orchestrated purposely to get the world economies growing again? Will this get the world economies growing again as the average person will now spend less on energy costs?

 

It's my personal belief that Saudi Arabia orchestrated the lower oil prices for the following reasons:

 

1) It's a shot at Iran.  Maybe putting pressure on Iran will entice them to give up their nuclear program.

 

2) ISIS has been selling oil.  I believe that is where they have been getting the majority of their profits.  Lower oil profits means less money for them and may weaken their base.  SA is certainly no friend of ISIS and it must scare the shit out of them to think that Iran is on one side and ISIS is on the other.

 

3) To a lesser degree, this hurts Russia and shale producers.  If this takes out some of the supply then it's icing on the cake.

 

I would be interested in hearing other's thoughts about the above?  Does anyone get anything from Stratfor?  I would be curious their take on this whole thing.

 

Thanks,

 

AtlCDore

 

I initially thought there was a strong geo-political aspect to the Saudi's decision to maintain production even in the face of falling crude prices.

 

However, the more I read about the Saudi's experience and thought process in the 70's and 80's, the more I think that this is entirely an economic decision on the part of the Saudi's.  This is illustrated by the Saudi's experience over the previous three decades.  In the past, in the face of falling crude, they cut production to maintain crude pricing.  A couple of things happened that negatively impacted Saudi Arabia.  First, Certain OPEC members have historically always exceeded their quotas, so the Saudis bear the brunt of the production cuts.  Second, by cutting production and maintaining higher crude prices, this has stimulated a higher rate of growth in non-OPEC production.  And third, as non -OPEC production has increased, the share of oil supplied by OPEC has declined substantially.  Fourth, higher crude prices reduce future crude demand substantially given that higher crude prices stimulate investments in alternative energy sources.  Fifth, the Middle East ships a substantial amount of crude to Asia, particularly China.  The Chinese have the largest shale deposits in the world, and they are getting ready to exploit them given their reliance on imported crude and imported gas.  Lower crude prices make it much less economic to pursue development of Chinese shale, thereby ensuring continued reliance on Middle East crude.  (Ultimately I think the Chinese will fail to exploit their vast shale deposits given their severe water issues, but that is a discussion for another day)

 

So I am led to believe that the Saudi's actions are entirely to maintain market share, and by doing so, the low prices will encourage an increase in demand while cutting the legs out from under development of certain crude alternatives. 

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...