vineri, 21 august 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Oil Crash Continues: West Texas Crude Below $40, Brent Near $45; Floating Oil Carry Trade in Review

Posted: 21 Aug 2015 12:12 PM PDT

The crash in oil prices continues. Here are a couple charts to consider.

West Texas Crude



Brent Crude



West Texas Intermediate broke the $40 barrier to the downside today but is slightly above that level now.

WTI last broke $40 to the downside in 2008 but has not had a monthly close below that level dating back to 2004. Brent is near the $45 mark.

Floating Oil Carry Trade Review

In 2008, hedge funds and other big money stockpiled oil in floating ships in the $30s waiting for a rebound. This time they did so at higher prices, and at a cost of $40,000 a day.

Let's investigate how that is working out for anyone still in the trade.

Flashback January 9, 2015: ​Major Oil Traders Book Tankers for Stockpiling Crude at Sea.
A continuous fall in global oil prices has prompted major oil traders to start hiring supertankers as they can benefit from stockpiling crude oil at sea.

The oil giant Shell and energy traders Trafigura and Vitol have booked crude tankers for up to 12 months, said Reuters, referring to the fixture lists provided by tanker brokers and oil traders.

Traders reportedly use the vessels to store excess crude at sea until prices stabilize as in 2009, when more than 100 million barrels were stockpiled this way. Then the news caused outrage over oil "speculators" supposedly waiting to sell oil at higher prices in future.

Shell has reportedly booked two vessels, and Vitol, the world's largest independent oil trader, has booked the TI Oceania Ultra Large Crude Carrier, one of the biggest ocean going vessels with a three million barrel capacity.

The move can be explained by the market phenomenon known as "contango", when spot or current prices fall below the cost of future shipment. It has happened for the first time since 2009 as spot prices fell by more than 50 percent in the last six months. This gives traders more reason to buy oil now, store it in tanks and benefit when demand recovers.

Trading firms have been able to hire the Very Large Crude Carrier (VLCC) vessels for less than $40,000 a day, compared to spot rates of $60,000 to $70,000 a day, according to the lists.

Traders can currently purchase Brent crude for less than $51 per barrel, while barrel for delivery in August costs more than $57, thus, in this case "contango" is more than $6. Analysts say the contango above $6.50 a barrel is needed to cover expenses on hiring a tanker, providing insurance and gaining profit from offshore storage.
West Texas Contango



West Texas Contango



Anyone still in the floating oil carry trade business is getting their ass seriously kicked.

Perfect Timing Anyone?



Stockpilers did have a chance for a nice profit between February thru June if they bought Brent near $50. But to that, they had to have near-perfect buy-timing, and they better have already sold.

Losses have mounted since. And anyone who thought this was a good idea above or near $60 is in deep serious trouble.

Mike "Mish" Shedlock
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Net Moves Since China Devaluation

Posted: 21 Aug 2015 11:11 AM PDT

Here's an interesting chart I picked up this morning in my email inbox from Steen Jakobsen, chief economist for Saxo Bank in Denmark.

Net Moves 11 Days After China's Yuan Devaluation



Since the devaluation, stocks and most commodities have been the big losers. Gold and US treasuries are winners.

Mike "Mish" Shedlock
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Yield Curve Flattens in Recessionary Manner; Rate Hike Odds Shift to December

Posted: 21 Aug 2015 12:04 AM PDT

Rate Hike Odds Shift to December

The Fed has been trying for months to convince the markets that rate hikes are coming in September. On Thursday the market took another look and came around to my point of view "I'll believe it when I see it".

CME FedWatch 2015-08-18



CME FedWatch 2015-08-20



Rate Hike Odds

The CME concludes there is a 23.57% chance of a hike. This is bad math because the CME ignores ranges.

If the Fed comes flat out and sets a target rate of precisely 0.25% that is a hike from here.

The current Fed stance is 0.00% to 0.25% and the actual rate has been about 0.14%. Thus 0.25% would be a hike of roughly 1/8 point (0.125 percentage points).

That said, it is certainly debatable if we see even that much of a hike. A look ahead at action in the CME Fed Fund Futures shows why.

Fed Fund Futures



To calculate the expected interest rates simply subtract the numbers in the first column from 1.00. In December, the expected average rate for the month is 0.28%. Simply put, the market is not expecting much more than an eight point hike all the way to December.

One Baby Hike Priced Out

Two days ago, in Plotting the Fed's Baby Step 1/8 Point Hikes; Yellen vs. Greenspan "Measured Pace", the December Fed Funds future was at 99.675, essentially implying an eight of a point hike in September and another in December.

On Thursday, the market just priced out one of those hikes.

Yield Curve Flattens

Curve Watcher's Anonymous is taking special note of the yield curve. Here is the chart as of the market close on Thursday.



click on chart for sharper image

Legend

  • 30-Year Treasury Yield: Red
  • 10-Year Treasury Yield: Orange
  •   5-Year Treasury Yield: Blue
  •   3-Year Treasury Yield: Green
  •   1-Year Treasury Yield: Purple

Synopsis Since January 2014

  • The short end of the curve (2- and 3-Year) acts as if hikes are coming.
  • The middle of the curve (5-year) seems ambivalent.
  • The long end of the curve (10- and 30-year) acts as if rate hikes are not coming or alternatively a recession approaches.  

Will the Fed disappoint the market by hiking?

I doubt it, but the odds can and will change between now and the next FOMC meeting on September 16-17.

Mike "Mish" Shedlock
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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