The Haiku of Finance for 06/17/19

Spot a big downturn
Stock tickers crash to new lows
See investors flee

Oil Slump Leads To Shale 2.0, The Great Crew Change, And COP21

The oil sector's bear attack shows no signs of abating. OPEC's Saudi-led push for huge overproduction is driving the US shale sector to the brink of collapse. The post-crash survivors can benefit from "Shale 2.0" technologies that keep their costs down. They will need every advantage they can get when the "Great Crew Change" makes finding human talent harder and the UN's COP21 protocols make hydrocarbon production less desirable.

High-sulfur US crude varieties are now so uneconomical that they command prices near zero or even negative in refining. You know your sector is in trouble when you have to pay customers to take your worst product away. Large US banks are strengthening their loss reserve allowances as loans to oil producers reach default thresholds. Thank the Federal Reserve for increasing required capital cushions. Some financial players tracking the oil sector have begun clamoring for a federal bailout. The energy sector's financiers did not get the memo that bailouts are political non-starters. Miscellaneous regulatory changes in Washington may make it easier for surviving drillers to market their product. Financial backstops for the entire sector are very unlikely now that regulators have learned lessons from the 2008 systemic crisis.

Oil drillers who survive the slump will contend with more favorable economics, and not just from an eventual rise in market prices. The Manhattan Institute's "Shale 2.0" study argues that Big Data will bring a revolution to oil drilling that dramatically reduces its cost structure. The think tank's longer study is worth reading for technical insights. Lower production costs across North America will make the continent's production less responsive to OPEC production changes.

Another factor working in the oil sector's long-term favor is the need for a "Great Crew Change" replacing the sector's retiring experts. OGFJ's coverage of the Great Crew Change reveals that hiring to replace experts is less of a priority when oil prices are low and producers shut rigs down. Hiring younger Big Data experts will bring the Shale 2.0 cost benefits to financially healthy producers first, giving them market power as they restart exploration. Only the financially healthiest producers can afford to both replace retired talent with new STEM hires and replace depleted fields with new exploration.

One other complicating factor facing oil shale producers is the finalization of the UN's Paris COP21 climate change protocols. The new regime will use both regulatory and financial incentives to discourage hydrocarbon production and favor renewable energy generation. The regime includes financial support for developing nations whose energy exports will suffer as their oil production is rendered uneconomic. US oil drillers who can afford to comply with COP21's controls may have a window of opportunity if some OPEC producers are deterred from production.

The oil sector's pain will pass at some point. US producers who are currently sour on crude (pun intended) will relish the economic advantages they can reap by being first to implement Shale 2.0 tech, first to hire younger engineers in the Great Crew Change, and firs to adapt to COP21 controls. The largest and least leveraged US oil producers should be first in line when the race begins again.

Full disclosure: Long position in USO.

The Haiku of Finance for 01/16/16

Howling bear market
Investors face hard headwinds
Winter should be cold

Winter Bear Markets Start Off 2016

Investors are watching wealth evaporate in the first month of 2016. Major market indexes are down and the CBOE's volatility measure is up. Sleepwalking to easy wealth is no longer the order of the day. Hard winters come with howling winds. Serious macroeconomic headwinds are howling at markets.

Did you think markets would go up forever? Think again. A few decades of consumer overindulgence left developed countries with bloated debt loads. Central bank stimulus was the co-dependent enabler that encouraged consumers, businesses, and governments to load up on cheap credit. Try digging out from under an unmanageable debt load. It's like digging out of a winter snowdrift.

China's economic fictions are now laid bare. Forget the forged official numbers. Australia's declining metal exports to China are real enough. The obvious Chinese recession will become a depression as state-owned funds liquidate shadow holdings and real estate creditors throw urban speculators out of their apartments. The only possible remaining stimulus in a Fourth Turning Crisis era is military spending. Expect Beijing's mandarins to ramp up militarism after a few years of bear market pain become unbearable for China's former middle class.

Live bears hibernate through the winter. Bear markets wake up whenever they feel the urge. Winter is coming, according to people who quote the Game of Thrones saga. Investors' winter is already here.

The Haiku of Finance for 08/21/15

Big stock plunge this week
China bears spook everyone
Call it correction

The Haiku of Finance for 10/18/14

October stock plunge
Precursor to major bear
Hinting at more drops

Alpha-D Update for 06/24/13

I haven't made any changes to my portfolio in the past few months, until today.  I sold covered calls over FXF because I believe the Swiss franc has stabilized in value.  The Swiss can't hold down their currency's value forever and it is still useful to me as a hedge against both the dollar and euro.

I have not changed my other long positions in FXA, FXC, or GDX.  Those are my other hedges against the US dollar.  The gold mining sector has been absolutely hammered of late, which will be useful to me if I decide to add to my GDX position.  I still have a bearish put position on FXE because I think the euro is toast.

My cash horde awaits the right time to deploy into individual stocks I follow and hard asset sectors like mining, agriculture, and the like.  I love the plummeting stock market action of recent days and the sow rise in interest rates that will make investors flee bonds.  Cheap assets are lifelong buys.

The Haiku of Finance for 10/19/12

Stock market weakness

Sharp earnings-driven selloff
Big disappointment

The Haiku of Finance for 06/07/12

Ben calls off QE
Comments downplay stimulus
Needs bigger bear run

The Haiku of Finance for 05/31/12

Stocks close end of month
Unimpressive performance
More of that to come

The Haiku of Finance for 05/29/12

Facebook sinks again
Insiders want to cash out
Lockups cause them pain

The Limerick of Finance for 12/25/11

A Santa Claus rally this year
Would make many bears shed a tear
With shorts they must cover
If stocks more than hover
A short squeeze would quickly appear

Operation Twist's Perverse Effects Confirmed

We did not need to wait long at all to see the Fed's desired end state become reality.  The stock market sank again today, while bonds rallied.  The crashing stock market makes bonds look desirable.  That will feed the federal government's insatiable desire to spend money it doesn't have and borrow money it can't pay back.  The falling 10-year Treasury rate will prop the housing market for another fake recovery.  Underwater homeowners can pretend they have regained lost home equity for a little while longer.  Those are all part of the Fed's master plan to keep America running on fumes. 

The reset of the American way of life to a much lower level of sustainable prosperity comes in fits but it comes nonetheless.  Stocks one week, perhaps bonds another week, then unfunded entitlement spending another week, until finally consumer spending collapses and pulls down seven decades of post-WWII middle class affluence with it.  The Fed can't keep the mirage up forever.  The age of Levittown was fun while it lasted. 

If it makes my readers feel better, I too am feeling the effects of this bear market.  The value of my GDX and FXI holdings are down with the rest of the equity market.  My reasons for holding them are still valid.  They are both long-term hedges of sorts against the U.S. economy.  China is carrying more internal debt than its foreign accounts surplus would indicate.  Gold's run up won't last forever.  I'm just glad I took time to reduce my holdings of each while they were highly valued.  My cash pile awaits the coming bargains. 

Full disclosure;  Long GDX and FXI with covered calls. 

Bears Winning in Q2 and Q3 2010

No, silly, not the Chicago Bears of the NFL.  I'm talking about the market's bears:

U.S. stocks fell on Thursday as manufacturing and labor market data heightened fears of a double-dip recession before Friday's key employment report. 

Major indexes were lower for a fourth straight day after suffering their worst quarter since late 2008, but losses eased near the end of the session.

This here third quarter is getting off to an exceedingly inauspicious start, if you catch my drift.  I'm not happy to see my fellow Americans' 401(k)s get gored, but I don't mind to see Wall Street's sell-side permabulls look like fools for predicting an early end to Great Depression 2.0.  How many of you believed the hype from politicians, CNBC, and other shills that we were out of the woods?  Go ahead and raise your hands, as I won't call on you individually. 

Am I the only one here who's mostly in cash?  Give me some decent stocks with single-digit P/E ratios (like TDW) and I'll put some cash to work.  Until then, I'm watching the carnage from the sidelines. 

Dow Down, Jobless Claims Up

I'm pressed for time right now so don't expect my usual supreme brilliance.  You'll have to settle for brilliance that's merely far above average.  Anyway, the Dow sucked rotten eggs today:

Stocks took their deepest plunge in more than a year Thursday as fears grew that Europe's debt crisis could spread around the world and undermine the U.S. economic recovery. The possibility has been brewing for weeks, but analysts said some investors are just waking up to it.

Yeah, "some investors" are the ones who don't read my blog.  Don't look too far for a cause of the market's woes.  Besides Greece and the usual suspects, joblessness is coming back with a vengeance:

The number of people filing new claims for unemployment benefits unexpectedly rose last week by the largest amount in three months. The surge is evidence of how volatile the job market remains, even as the economy grows.

Come on, what's with this "as the economy grows" caveat?  Last quarter's growth numbers will be revised downward anyway. 

Newspaper Biz Continues to Spiral Down

In good news for bloggers like yours truly, the reading public continues to abandon newspapers:

Circulation continues to drop severely at U.S. newspapers, though the rate of decline slowed from the previous six-month reporting period.

Figures released Monday by the Audit Bureau of Circulations show average weekday circulation fell 8.7 percent in the six months that ended March 31, compared with the same period a year earlier. Sunday circulation fell 6.5 percent.

Keep up the good work, print media.  Oddly enough, that old stalwart the Washington Post Co. (WPO) has an ROE of 3% but is trading within 97% of its 52wk high.  Some folks are getting irrationally exuberant here.  Hey, WPO, don't forget to turn the lights off on your way out.  I'll be sure to let your last advertisers know that there's some space for rent here on my blog. 
 
Full disclosure:  No position in WPO.

Peak Market (Finally)

Perhaps Mr. Market has finally come to his senses and realized the recovery isn't happening. I tried to tell him last year that he was overvalued at Dow 10,000 but you know he never listens to me. Maybe now he's finally listening . . .

. . . to the creaking sound of European economies straining under huge sovereign debt loads . . .

. . . to the winter storms raging outside his window that are driving up the cost of energy . . .

. . . to the sobs of unemployed workers as small businesses continue to fire them.

At any rate, no matter who or what has his ear, Mr. Market is nudging back in the direction of the bears. I couldn't be happier, because I've got some cash to spend on bargain-priced stocks.

ISM's Service Sector Isn't So Rosy

You think today's ISM report heralding an increase in non-manufacturing activity is a bullish sign? Only if you don't read what really drove the increase:

Federal Reserve efforts to unlock credit and government measures such as “cash-for-clunkers” and a tax credit for first-time homebuyers are reviving demand and likely helped the economy grow last quarter. Nonetheless, last week’s report showing job cuts accelerated in September is a reminder that gains in purchases may not be sustained as incentives expire.

Come on, folks. Take away the stimulus and you take away the rosy economic results. I can't short the market while these stimulus measures are in place because average investors are piling into what they think is another great bull market. Scared to be left behind, reader? Here are some investment voices who aren't worried about being left behind:

New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.

If you don't believe them, believe this guy:

Nobel Prize-winning economist Joseph Stiglitz said unemployment is going to keep rising and should be the main focus for policy makers, and that gains in the stock market indicate investors have been “irrationally exuberant” about a recovery.

These guys are all on the same sheet of music. I'll add my voice to the same choir. IMHO this market is overvalued and headed for a decline, but I'm not going to bankrupt myself by shorting into an overbought rally.

Crime Doesn't Pay . . . For Some People

Note to fraudsters: You can't always get away with ripping off your clients:

After months of secretly working with the FBI, Bernard Madoff's right-hand man emerged in federal court on Tuesday and pleaded guilty to conspiracy and other charges, contradicting claims by the disgraced financier that he acted alone.

Now if only we can jail the bankers being paid to fraudulently hide junk assets on their balance sheets. Nah, forget that, regulators would rather just ask them to be more discreet when cashing their chaecks:

Bonuses are already set to rise next year, according to New York-based pay consultant Johnson Associates Inc. The incentive compensation for employees in fixed-income divisions of banks may jump 40 percent to 50 percent from last year, the New York- based firm said. Bonuses at asset management firms may fall as much as 35 percent, the report showed.

Last time I checked, mortgages are considered to be fixed-income instruments. That's how they're rated, packaged, and marketed to CMBS buyers. The co-conspirators (banks' fixed-income credit analysts) in hiding the banks' fictionally performing mortgage assets are thus planning to pay themselves even more next year.

What are the crooks rewarding themselves for? Cooking their books, of course. Analysts and auditors who falsely portray non-performing mortgage loans as high-quality assets succceed in delaying inevitable home foreclosures. That gives a whole bunch of unemployed homeowners the impression that the economy isn't getting worse. Does it feel like a bottom? A lot of people are fooling themselves into thinking so:

Optimism on U.S. equities climbed the most since April, according to the Bloomberg Professional Confidence Survey. Investors expect equities to rise during the next six months in a record seven countries, with indexes in Brazil, Italy, the U.K., France, Mexico, Japan and Switzerland forecast to advance.

Good luck, folks. I'm not one for self-delusion. There is no economic recovery. Commercial real estate harbors the next set of defaults to hit the economy. When those hit, we'll be right back in a credit crunch.

I'm staying short.

Finally, Some Market Sanity and Common Sense

Stocks started today trading down. For once in his life, Mr. Market shows signs of rationality:

U.S. stocks fell and the Standard & Poor’s 500 Index retreated from an eight-month high as consumer confidence trailed projections and companies from Office Depot Inc. to Coach Inc. posted worse-than-estimated results. Oil and metal prices slid, while Treasuries climbed.

Maybe investors are listening more to their own common sense and less to the crummy Wall Street analysts I referenced in yesterday's post. If they do listen to common sense, maybe they'll hear it screaming this:

Confidence among U.S. consumers fell more than forecast in July, reflecting a surge in unemployment that threatens to undermine household spending.

The Conference Board’s confidence index dropped to 46.6, a second consecutive decline, following a reading of 49.3 in June, a report from the New York-based group showed today. The figure reached a record low of 25.3 in February.

I heard that! Now hear this: This bear market is still alive and kicking. I'm not paying any attention to "green shoots" that are suitable for some dingbat sell-side analyst's hookah.