Wednesday: Awaiting the Fed at 2 pm

[BBERG] This quote from the Bloomberg oil newsletter this AM:

Producers of “tight oil” from shale rock formations will be hurt by the fall in crude prices before members of OPEC, according to the group’s Secretary-General.

As much as 50 percent of tight oil output is at risk at current prices, while OPEC is not in a critical situation, Abdalla El-Badri said at the Oil & Money conference in London today.

“First of all, it will be the tight oil” affected by the drop in prices, he said. “There’s no doubt about it. If prices stay at $85, we will see a lot of investment, a lot of projects, a lot of oil going out of the market,” he said. Front-month Brent crude futures, the global benchmark, traded at $86.72 a barrel on the ICE Futures Europe exchange in London at 10:17 a.m.

The fall in prices since June does not accurately reflect the supply situation in the market, El-Badri said. “We see that demand is still growing, that supply is also growing, but the magnitude in the increase in supply does not really reflect this 25 percent change in the market,” he said. “Unfortunately, everybody is panicking.”

OPEC must be ready to raise production because “whatever the price,” tight oil output will peak between 2019 and 2020, El-Badri said. “From that period, OPEC must be ready to produce about 40 million barrels a day of oil.”

Then this nugget a few pages later:

Brent oil will be at $70-80 for a while,
according to the former OPEC head of
research, but $80 a barrel is still high
enough for investments in oil and gas
to be profitable, Adnan Shihab-Eldin,
director-general of the Kuwait Foundation
for the Advancement of Sciences,
said at a media briefing in Singapore.
Geopolitical factors and supply disruptions
kept oil prices at around $100 a barrel in
the last two to three years.

​Is OPEC now looking a gift horse in the mouth? Have they had another “a ha” moment? Can they deal the US and the shale players some pain by keeping Brent at $80 and keeping WTI prices low as a result?

What a game.


Tuesday: After Brazil’s Election and Oil Drops Below $80

[BI] WALL STREET’S BRIGHTEST MINDS REVEAL THE MOST IMPORTANT CHARTS IN THE WORLD Shows chart about the 5-year forward interest rates forecasting slow growth.  Also about Europe importing deflation. The chart of the velocity of money keeps popping up. On Turkey being fragile. Inflation expectations. Shaky Chinese GDP forecast. US fixed investment in oil. HY Bonds selling off and equities are trailing. Sagging German investor sentiment… ECB needs to do QE to save Europe? Divergence between EPS and Price… multiple expansion in Europe. China housing downturn is deepening. Since GFC, rates lower, dollar stronger, inflation debatable but tame-ish. ECB has no room for policy error with yields as low as they are. Chart showing Fed breakevens have deflationary fears gripping the economy. Trade growth (currency war to trade war?) has also been stagnant. Great point here about whether the Fed can really raise rates… and how high can they raise them when they do? Outperformance vs. underperformance since the pre-recession peak. The French economic disaster.

[BIG] Domestic stocks do better in a strong dollar environment.

[UBS] Chart showing significant impact US current account balance shifts have on big events.

[WSJ] “Wall Street Reins in Bullish Calls on Oil

Many traders and analysts have been caught off guard by the market’s selloff. The U.S. shale-oil boom has remade the energy landscape, creating a glut in a market that had seen years of tight supplies and forcing investors to reassess the outlook for entire industries, countries and the global economy.

With an OPEC cut apparently off the table at the group’s next meeting on Nov. 27, oil needs to get cheap enough to encourage other producers to dial back, Goldman said. The bank’s head of commodities research wasn’t available for comment. On Monday an official in Iran, which typically calls for oil prices to stay high, said he doesn’t expect OPEC to cut production.

“OPEC will no longer act as the first-mover swing producer,” Goldman said in a note to investors. “We are lowering our oil-price forecast to the price at which U.S. production growth slows.”

[WSJ] “European Bank Stress Tests Make ‘CoCo’ Bonds Sweeter

CoCos pay coupons like conventional bonds, but if a bank’s key capital ratios sink, they can convert into common equity—which doesn’t pay interest and is first to be wiped out if a bank fails. That makes them riskier to hold than conventional bonds.

But a passing grade on the stress test is a signal that conversion is less likely.

Banco Popular Español SA, for instance, which passed the test, saw its CoCo, issued toward the end of last year, trading a whisker under 7% on Monday down from just under 8% on Friday, according to Tradeweb. A decline in yield reflects a rise in price.

The yield on a CoCo issued by Banco Bilbao Vizcaya Argentario SA in April last year was around 0.1 percentage point lower on the day at around 6.2%—a limited move, but still notable compared with its conventional senior bonds, which were unchanged on Monday.

[WSJ] “U.S. Stocks End Little Changed After Last Week’s Rally” Strong dollar?

“The U.S. is the place to be right now,” said Mike Serio, regional chief investment officer at Wells Fargo Private Bank, which manages $179 billion. “We’re seeing money continue to come into the U.S., continue to go into our stock market and continue to go into our bonds.”

Mr. Serio said the bank is keeping client portfolios focused on U.S. companies, particularly those likely to benefit from an expanding economy, like industrial and information-technology firms.

Monday’s pause comes on the heels of a strong week. The S&P 500 jumped 4.1% last week, marking its largest weekly percentage gain since January 2013. The Nasdaq Composite increased 5.3%, the biggest weekly percentage gain since December 2011.

European markets pared their steepest losses, but were widely lower. The Stoxx 600 Europe index closed with a 0.6% loss, despite news that the European Central Bank’s stress tests showed that all but 13 of the region’s leading banks have enough capital to survive another period of economic turbulence. The stress tests are part of an effort to reassure investors that European lenders are back on track.

The decline comes amid persistent skepticism among investors about the health of Europe’s banks and the ability of the ECB to cope with a broader economic slowdown, said Michael O’Rourke, chief market strategist at JonesTrading.

”You could say every bank in Europe is healthy and I’m pretty sure 99 out of 100 investors would doubt that,” he said.

Brazilian markets fell sharply after elections Sunday showed President Dilma Rousseff winning a second term by a narrow margin.

Investors worry that the victory could prolong the country’s economic stagnation. The Ibovespa, the country’s main stock market index, was recently down 2.8%.

In commodity markets, crude-oil futures fell as much as 1.9% intraday, spurring a sharp selloff in energy shares. Though energy stocks remained lower, futures recovered most of their losses by afternoon. The December Nymex contract settled lower by a penny to $81 a barrel.

Michael Antonelli, sales trader at Robert W. Baird, said investors are struggling with the implications of the recent slide in oil prices. While lower oil prices are generally a benefit to consumers and companies that consume large amounts of fuel, the retreat has been accompanied by signs of weaker economic growth globally.

”Everybody is watching crude for some sort of clue,” he said. “At some point, lower crude prices are a boon…At this point, the deflationary impulse and the slower growth seems to be winning the argument.”

Gold futures lost 0.2% to $1229.10 an ounce.

In economic news, U.S. pending sales of existing homes increased 0.3% to a seasonally adjusted index level of 105 in September from August, the National Association of Realtors said Monday. An index level of 100 is considered an average level of contract activity. The increase was smaller than expected.

The Fed is due to hold a two-day policy meeting that concludes Wednesday, with investors eagerly anticipating further guidance on the timing of interest-rate hikes. The Fed also is expected to end its bond-buying program. On Thursday, investors will get an update on third-quarter U.S. economic growth, expected to show growth of 3.1%.

”This is a pivotal week overall,” Mr. O’Rourke said. “The amount of news we have coming out should fuel volatility in both directions.”

[WSJ] “Nickel Slides to Near Eight-Month Low as Stockpiles Climb

In other markets, copper prices rose on speculation that China has begun buying the metal on the open market. China is known to buy copper for its reserve when the price of the metal dips. Traders said they think China’s State Reserve Board last stepped into the market in March and April.

“While we do not have confirmation of this, we believe the SRB is likely to buy this quarter in size exceeding the 200,000 to 300,000 tons purchased in March-April,” said David Wilson, a strategist at Citigroup, in a note to investors. “Current prices are near those at which the SRB previously purchased.”

Copper for December delivery, the most actively traded contract, climbed 0.8% to $3.0640 a pound, the highest settlement since Oct. 14, on the Comex division of the New York Mercantile Exchange.

Prices for copper may also have received a boost after a labor union served plans for a one-month strike at Freeport-McMoRan Inc.’s Grasberg mine in Indonesia, the world’s third largest copper mine.

“Disruptions to supplies from one of the world’s major copper mines could result in tighter market conditions and thereby lend support to the price,” said Ole Hansen, an analyst at Saxobank.

[WSJ] “Low Prices Lure China into Oil Market

The trading unit of state-run China National Petroleum Corp. has bought 36 cargos of crude oil in the open market so far in October, the largest purchase ever in a single month, Singapore traders familiar with the transactions said.

The purchases show how China, the world’s second largest consumer of oil after the U.S. , is taking advantage of the energy glut to stock up on oil used for making transportation fuels like gasoline and diesel. It’s also a change from usual buying patterns as Beijing normally secures its oil needs through long-term contracts with fixed prices—and is rarely a big player in the Singapore spot market, Asia’s biggest oil trading hub…

The oil shipments are scheduled for loading in December and are expected to be delivered at Chinese ports in January. China’s last big purchase in the Singaporean market was 16 cargos in April, with its buying rate averaging just three cargos a month from June to September.

A spokesman for PetroChina Co. Ltd., the listed unit of CNPC, didn’t immediately respond to inquires for comment.

Traders say China has frequently taken advantage of price drops to buy up cheap oil, though never on this scale, and that the strategy implies China views the current oil price decline as temporary.

“If the Middle Kingdom puts the barrels into strategic storage, something that would be logical given low outright prices, they will disappear entirely from the market and China will still have to buy more crude for its day-to-day needs,” analyst Richard Gorry at energy consulting firm JBC Energy said.

Although China’s oil demand has been weak this year, up 2% from last and its slowest rate since 1990, its oil import levels have been strong at around 8.5% as large volumes went into filling its strategic petroleum reserve, analyst Neil Beveridge at Bernstein Research said.

[WSJ] “Newest Workers for Lowe’s: Robots” These robots are coming. What are the picks and shovels cos?

[WSJ] “What’s Not to Hate About Car Electronics” The point is infotainment systems are problems. I hate them. Most people do. There is an opportunity here.





Monday: After the ECB Stress Tests

[WSJ] Story about big copper buyer. “Single Buyer Holds Mountain of Copper”. A single firm has owned at least 50% of the LME warehoused copper for last 4 mos. Less than 160k tons in warehouses since mid-June vs. 360k at beg of year so easier to do. Concentration under a single firm’s control is driving up prices.

[WSJ] GDP Q3 expected at 3.1% for U.S. but would lift avg Q growth to only 1.9% for U.S. Inflation not where Fed wants it… “Bond Bears Hibernate as View Darkens” PCE only up 1.5% in August from year earlier vs. 2% where Fed wants it. Doubt Fed can hit targets so likely to remain accommodative. NOTE: Foreign buying is driving yields lower. May have volatility in shorter end but less in longer end. Also… this buying will drive more U.S. dollar strength.

[WSJ] “Troubles in China Rattle Western Banks” Focus is on govt seizure of assets and execs disappearing with no notice and foreign lenders being left in the lurch. China is biggest EM market borrower in world. Foreign capital seeking higher returns, of course. Bad loans are spiking for CHINESE lenders and this is very likely to cause a wave to foreign lenders. After all, won’t the Chinese find some way to protect their own??

[WSJ] “Hong Kong-Shanghai Stock Link Hits Delay” not a question of if but a question of when. This link helps mainland investors buy HK listed shares as well as foreigners buy Shanghai shares. Question: Is there an angle to invest in the HK ETF here? Take a look.

[WSJ] “Some Big Banks Pass Stress Tests Just Barely” Lloyds “barely” passed stress test but is looking to reinstitute a dividend. There is a UK stress result release on 12/16. Maybe Lloyds stock jump and rally to there. Is there a possible options speculation on this? Take a look.

The Week’s Calendar:

Economic Calendar



[WSJ] “China to Cut Top Pay at State Firms” More evidence the Chinese market isn’t well, exactly market driven. This could lead to a flight of talent out of the SOEs and into private companies or out of the country entirely. “If you are a commercially oriented CEO, what’s the incentive for knocking yourself out if you can’t get paid any more money?” Xi Jinping wants corporate leaders loyal to party. This could lead to more corruption and reduced incentive to take commercial risks.

[WSJ] “Falling Oil Prices Hang Over Refiners” Refiners could face a long-term threat to margin if oil export ban is lifted. There is a big battle about to begun to be fought here.

[WSJ] “Retailers Recruit Customers for Jobs” Employers are playing chicken with wages… how much slack is there in the market before they start raising wages.

[WSJ] “Venezuela Says it Won’t Sell Citgo” President Nicolas Maduro says the country won’t sell… they could sell for as much as $10 billion. Ven economy to contract by as much as 3% this year. Ven depends on oil for 96% of its hard currency income. Price drop troubles overseas bond holders. Will Ven be able to repay? Yields are up to 19% on sovereign debt. Maduro approval down to 30%. Inflation at 60%. Sale of Citgo would leave those bond holders one less piece of collateral. Country needs to look at currency controls, public spending and gas px subsidy (enough to make gas cost just $0.06 per gallon). Costs the country $12 billion per year.

[WSJ] “US Fights Critiques of Internet’s Management” International Telecommunications Union wants control of the Internet… US says it is better where it is… somewhat disjointed. Chinese guy is in the Sec General spot now.

[WSJ] Also a very interesting story about film slates and investors and the Paramount lawsuit. Good background for potential biz with S Smith.


Other Notes 20141026

[JM] “The Fed announced that it will hold onto its $4 trillion balance sheet that it has accumulated since November 2008, which should restrict the supply of government notes and keep the borrowing costs down.

[JM] Protectionism is on the rise… a natural product of globalization. Currency wars… Japan has started it. And the weakening there will Continue reading

WSJ Stories 2014102526

- P&G’s two divisions that are doing worth a damn are health care and baby, feminine and family care. Tells me this is where the general growing demand is. Is there a more pure play in this area? Strong dollar is a problem for P&G, as is stubborn global growth.

– Investors tend to kid themselves about how much they can really stand to lose. (Remember the conversation with D.F. and the robo thing.) Continue reading