On Market Analysis
On Precious Metals
On Oil Prices
On Economics
On The Dollar
Joseph S. Kalinowski, CFA
Thoughts on the market, economics and politics
Sunday, December 7, 2014
Monday, December 1, 2014
Articles of Interest
Market Analysis
On the market rally
On corporate profits
Commodities
On falling oil prices
and the effect on the high yield market
On oil as an investment
On oil and the economy
On PGM price fixing
On PGM as an
investment
On the dollar
On the Swiss gold
referendum
Politics & Policy
On Regulation
My favorite WTF
article
On brining pigs and
small horses on commercial flights???
Joseph S. Kalinowski, CFA
Thursday, November 27, 2014
The Price for Oil Will Rebound
While those of us in this country are enjoying our Thanksgiving
festivities today, OPEC will be meeting in Austria to discuss oil production.
Given the abysmal collapse in oil prices in the second half of this year, the
meeting has taken on greater importance with profound economic and industry
implications. The price of Brent crude oil is down more than 20% from its
summer highs of $105 per barrel and WTI hasn’t fared much better. Many experts
are expecting a modest reduction from OPEC as a result of today’s meeting but
nothing is certain. Saudi Arabia has been a supporter of lower oil prices and
may not be as accommodating some sources say. As a possible ploy to wound
Russia, ISIS and other OPEC members both politically and economically, Saudi
Arabia may entertain weakened oil prices for some period of time.
Additionally, there are many who speculate the true motive
behind this “squeeze play” is to put a dent in the U.S. shale revolution that
has taken hold, increasing U.S. oil output by more than 40% in the past eight
years. While the growth in output is impressive, one needs to recognize that
production costs in the U.S. can be three to four times that of Middle Eastern
production. Thus greater survival odds from a price war lie heavily in Saudi
Arabia’s favor.
| http://www.businessinsider.com/citi-saudi-arabia-wont-win-this-oil-standoff-2014-11 |
Market experts place a $70 per barrel price target on Brent
crude as a breakeven point for the U.S. shale producers but that number has a
fairly wide range, from $50 to $120 depending on the efficiency of the well.
| http://www.businessinsider.com/shale-basin-breakeven-prices-2014-10 |
According to the U.S. Energy Information Administration,
Saudi exports to the U.S. have dropped by almost 30% since the summer from 1.25
million barrels per day to below 900,000 barrels in August. They have been
producing 9.6 million barrels per day accounting for roughly 31% of OPEC’s
production as other OPEC members gripe about the pricing strategy the Saudis
have embraced. Many experts speculate that OPEC would need to announce a 1
million barrel per day reduction to stop the free-fall.
| http://www.businessinsider.com/opec-november-27-meeting-preview-2014-11 |
The supply issues are magnified by current global demand as
Europe and China struggle economically. In the case of Europe, they are working
towards avoiding a recession throughout the region while China is struggling to
maintain its growth profile of the past several years. China is the number one
consumer of oil and is facing a slowdown that threatens to bring GDP growth
below its targeted 7%. Experts point out the economic dynamics at play in
China, i.e. record leverage and weakening real estate, thus a slowdown in that
region will impact the global economy and the price of oil exponentially.
Taken from MarketWatch (via Zero
Hedge), “As to how low the oil prices
can go, that depends on how much China will slow down as the number-one
consumer of oil. China’s financial system is operating on record leverage at
the moment. Record leverage in the financial system and a sharply weakening real-estate
market suggest that their economic slowdown has the potential to carry far
below Beijing’s GDP growth target of 7%.
Yes, China has had
three real-estate downturns in the past seven years, but the latest one is
coming at a time of debt-driven boom, which means the consequences this time
can be quite different. I used to think that China was a classic
savings-and-investment economic-growth model, and it was, but that was 10 years
ago.
I no longer think
that, since GDP growth in the past five years has come from ever-increasing
leverage ratios in the banking system. No debt-driven boom is permanent by
definition, so the decline in the Chinese real-estate market has the potential
to create a domino effect there in 2015. If China does decelerate well below 7%
in 2015, an oil price target in the $30 to $40 range is completely realistic.”
Talk about a worst case scenario. Another item that should
be highlighted is the current state of the high yield market. The Alliance Bernstein
blog has done a fantastic job covering this area. They postulate (via Business
Insider), “Energy-sector high-yield
bonds have been at the epicenter of recent volatility in the global high-yield
market. Between late August and mid-November, the US high-yield energy sector
is down 6.2%, compared to a 1.7% decline for the broader US high-yield
corporate-bond market. Since 2000, energy companies have invested some $1.5
trillion into operations—mostly exploration and production—and they’ve taken on
a hefty share of debt to do it. Debt issued by energy firms today comprises
more than 15% of the Barclays US High Yield Index, compared to less than 5% a
decade ago (Display). But not every segment of the energy industry stands to
benefit. Oil prices are now below $80 a barrel—in part a result of the supply
glut caused by the North American production boom. Small companies that have
levered up to fund exploration and production will see their margins
squeezed—with bankruptcy a distinct possibility in some cases. As a result,
many firms no longer have access to capital markets. But we think investors
should think carefully before deciding to snap up their existing debt at a
discount.”
| http://www.businessinsider.com/the-problem-with-high-yield-energy-bonds-2014-11 |
As contrarian investors, we are of the opinion that the energy
sector is an intriguing place to look for investment purposes. More
specifically, companies that will benefit from rising oil prices are what we
would like to introduce to the portfolio. The price of oil will not fall into perpetuity.
The global supply/demand dynamics assure that. As demand for oil increases
annually, production for the black stuff needs to grow exponentially as wells
are in a constant state of decline (this is especially the case for North
American Shale). Therefore it will take significant capital investment just to
keep pace with global demand of 1% per annum. That along with the inherently
volatile region that produces so much oil gives us comfort in knowing that the
price of oil will reach $100 per barrel in the future. It may take some time,
but my instinct tells me not as long as many are expecting.
Next week we will be providing some opinions on investments
that we are contemplating. Until then, we wish all a Happy Thanksgiving.
Joseph S. Kalinowski, CFA
Additional Insight
Energy & Oil
Prices
On OPEC Meeting
On Oil Prices
On Oil Demand
On Supply Production
On the Economy
On Gas Prices
On High Yield
Securities
On Energy Stocks
On Energy Politics
Sunday, November 23, 2014
PGM Update
It appears the PGM market has caught a bid this week as all
three metals; platinum, palladium and rhodium finished the week strong.
Expected global auto sales figures provided by Scotiabank
have undoubtedly placed a positive note for the PGM space. Their analysis is
predicting total worldwide auto sales to reach 72.12 million vehicles this
year, an increase of 5% over last year. Strong sales figures in the U.S. are a
driver of the gain but they also point out that auto sales in China increased
8.4% for the first half of the year and Canada is expected to break an all-time
record this year with 2 million cars sold. Given the supply and demand dynamics
that we have written
about in the past, Scotiabank anticipates upside for the PGM space looking
forward with a greater emphasis on palladium.
Officials from Russia and South Africa met recently to discuss
price stability in the market. These two nations produce a large supply of
the world’s PGM product with close to 70% of platinum coming from South Africa
and nearly 40% of the world’s palladium supply stemming from Russia. The
outcome of the talks have resulted in continued conferences in the first half
of next year, “to collaborate on technology development and jointly exploring
new applications for the metal” according to Phuti Mabelebele, a spokeswoman
for South Africa’s mines ministry.
What I find exceptionally interesting is the formation of
the World Platinum Investment Council (WPIC). This is a consortium of
the six largest platinum producers worldwide with the explicit focus on
assisting, “high
net worth and retail investors gain a better understanding of the platinum
investment opportunity through the provision of independent data, information
and insight.”
I have two roles when
approaching the PGM space. My primary role is running the hedge book for recyclers
of PGM, notably AAA Catalytic Recycling Inc., tracking the ounces and
appropriate pricing in the spent catalytic converter space to maintain margins.
This role demands a shorter term focus on the day to day fluctuations in an
attempt to shelter the recycling facility from as much commodity risk as
possible.
That said, the investor in me looks at the PGM space and
more specifically platinum prices and realizes this is a major contrarian
opportunity that will pay off handsomely over the next several years. It is for
this reason that I expect to be launching a fund specifically designed to buy
and carry the physical metals extracted from the recycling space at the start
of next year. This investor believes the WPIC initiative is well timed and will
be extremely beneficial as we head into 2015.
Suggested Reading
Slightly off the
beaten path
While I’m not following gold as much as the PGM group, there
has been interesting developments within the space that are worth mentioning
and can have an impact on gold prices. On November 30, the Swiss will be
heading to the polls to vote on the Swiss gold referendum. Should the
referendum pass, it will require the Swiss National Bank to boost their gold
holdings to 20% of all assets, up from 7.7% currently. They will repatriate 30%
of their gold holdings abroad and will have restrictions on the sale of the
gold held in reserve. One would imagine this would have a positive effect on
gold prices and has certainly added a bout of volatility
to the yellow stuff.
Zero Hedge has done a great job breaking down the story as
it unfolds.
Joseph S. Kalinowski, CFA
No part of this report may be reproduced in any manner
without the expressed written permission of Squared Concept Partners, LLC. Any information presented in this report is
for informational purposes only. All
opinions expressed in this report are subject to change without notice. Squared Concept Partners, LLC is an
independent asset management and consulting company. These entities may have
had in the past or may have in the present or future long or short positions,
or own options on the companies discussed.
In some cases, these positions may have been established prior to the
writing of the particular report. The
above information should not be construed as a solicitation to buy or sell the
securities discussed herein. The
publisher of this report cannot verify the accuracy of this information. The owners of Squared Concept Partners, LLC
and its affiliated companies may also be conducting trades based on the firm’s
research ideas. They also may hold
positions contrary to the ideas presented in the research as market conditions
may warrant.
Weekend Reading
Market Analysis
Monetary Policy
The Economy
Politics & Policy
Joseph S. Kalinowski, CFA
Wednesday, November 19, 2014
Power Dinner
My good friend Joseph called me this morning. He is a classic type A personality that can
get your juices flowing in the morning better than a shot of double espresso.
He informed me that he was having dinner with a few “influential” members of
Congress tonight.
I wasn’t invited.
That said, he did offer up the opportunity for me to compile
a list of talking points for him to discuss over dinner. Here are a few
suggestions/concerns that come to mind when immersed in the wonderful game of
Washington politics.
GOP Control of
Congress – In a sweeping referendum against the policies of the Obama
administration, the GOP took control of congress, winning the Senate and
increasing their control of the House for the first time in eight years. There
was an overriding theme that it was a message from voters against a
“do-nothing” Congress to reach across the aisle and get something done. This
constituent agrees that there should be productive bills presented and voted on
for the merits contained within the legislation and how the benefits of that
bill will better the country. The days of spiteful politics should end. That
said we should refrain from legislating for the sake of legislating. Specific
bills that are voted down are voted that way for a reason. If a bill is
presented that is too one-sided or will not produce its’ intended purpose of
bettering the country, then I’m in support of gridlock.
Clarity of Message
– Now that the GOP controls Congress one certainly hopes that they will have a
clear and focused agenda. We don’t want a rehash of the Contract with America –
but something that we the constituency can look forward to, track and judge - a
concise and organized Congressional roadmap.
Tax Reform – Our
corporations pay the highest tax rate in the industrialized world. Our tax rate
of 35% is uncompetitive and promotes creative tax accounting and inversion. Through
the use of loopholes, large corporations with large legal and accounting
departments have the ability to bring their effective tax rates as low as 13%. Congress
should lower the corporate tax rate. It would be constructive reform with
bipartisan roots. The economic benefits would satisfy the right and equal
opportunity for corporations among varying sizes will satisfy the left.
Corporations will stay in this country and tax receipts may improve.
Repatriation Tax
Holiday – U.S. multinational firms are storing over $2 trillion in offshore
profits because bringing those funds back to this country will subject those
assets to a 35% repatriation tax. In 2004 Congress offered a repatriation tax
holiday that allowed corporations to bring up to $500 million back to this
country at an effective tax rate of 5.25%. It has been hotly debated as to the
direct benefits those assets actually provided to the economy, many saying the
experiment was a failure. This time around we should offer a repatriation tax
holiday that will be directly invested for jobs and growth. Using the funds for
direct investment into infrastructure is an idea that has been tossed up. This
constituent believes the repatriation tax holiday will be stimulative if
applied the right way this time around and should enjoy bipartisan support.
Regulation – Small
businesses are being strangled with over-regulation and it has a sapping effect
on economic growth. This issue is of the utmost importance considering small
businesses are the key driver of economic activity and jobs. This constituent believes in limited
government and asks Congress to enact legislation to thoroughly comb through
the 15 departments, 69 agencies, 383 sub agencies and the nearly 200,000 pages
in the Code of Federal Regulations and trim the waste. A study from the Small
Business Administration, a government body, found that regulations in general
add $10,585 in costs per employee. Fixing this problem will have a profound
effect on economic growth.
Budgetary Concerns
– There should be a measured and calculated approach to balancing the budget
and bringing the national debt to more reasonable levels. Taking the time to
find waste, fraud and abuse among the varying government entities should be
something taken seriously. We should avoid another sequestration type of
hacking and certainly another fiscal cliff. Taken directly from the Citizens
Against Government Waste website,
“It is within the context of these looming, significant spending decisions that
Citizens Against Government Waste (CAGW) releases Prime Cuts 2013. CAGW has
been publishing the document since 1993. This year’s version contains 557
recommendations that would save taxpayers $580.6 billion in the first year and
$1.8 trillion over five years.” These types of proposals should be taken
seriously.
As of the time of
this writing, the breaking news has been President Obama’s plans on immigration
reform through executive
order. This just crossed the wire and I am sure this will be a topic
discussed as well.
I wish Joseph fine dining and hope he would pass along these
thoughts to his dinner companions.
Joseph S. Kalinowski, CFA
joe@squaredconcept.com
Sunday, November 9, 2014
Platinum Update
Precious metals had a bit of a difficult week. Platinum lost
ground with a range from $1241 down to $1195. Palladium had a range of $805 to
$754 and Gold varied $1170 to $1142. Slowing global economic growth, the threat
of disinflation, slowing auto sales and the end of quantitative easing in this
country has taken its toll on the precious stuff. Not to mention the strength
of the dollar versus other key currencies has added further downward pressure
to metals across the board.
That said, we have taken the contrarian view and consider
the sector, and especially Platinum worthy of consideration as a longer-term
investment. Several weeks ago we highlighted the virtues of Pt. We
wrote, “Given the tale of doom
surrounding platinum, as a contrarian investor one needs to consider the
prospect of an investment in the metal. For one, demand for the metal
(especially in the automotive arena) exceeds global supply.
Figure one shows total
global supply and total global net demand for platinum. These figures are
provided by Johnson Matthey as shows a global deficit for the metal in 2012 and
2013. Barclays estimates that there will continue to be a global deficit for 2014
and 2015 to the tune of 1.8 million and 433,000 ounces, respectively. The large
deficit for 2014 was largely related to the South African mining strikes that
took an estimated 1 million ounces off the market.”
Looking at figure two, the supply / demand scenario should
work well for the price of platinum over the long haul.
The fundamental support from favorable supply-demand
dynamics is what is intriguing to us but we are watching Pt prices closely and
are building long-term positions. As we continually monitor the price of Pt,
one item jumped out. When looking at the daily price chart for Pt, it is
possible that we are seeing a major bullish divergence between the price of the
metal and its Moving Average Convergence Divergence (MACD) profile.
Several weeks ago Pt suffered a major bout of selling
pressure but soon after rebound to more reasonable levels. Recently the metal
has relinquished to the bears and have resumed its downward trend. Friday’s
action saw a bit of strength. If this should turn out to be another bounce at
these levels then the run could be quite aggressive. Notice how the price of
the metal is making a lower-low while the MACD is registering a higher-low.
This technical pattern paves the way for a near-term rally for Platinum. Should
this be the case it would confirm that selling pressure is abating.
We are not suggesting near-term trading around the idea. We
are longer-term holders but this information is useful for those of us that run
a hedge book (we do) and attempt to mitigate near-term price fluctuations as we
deal in the physical metal on a daily basis.
Joseph S. Kalinowski, CFA
joe@squaredconcept.com
Suggested Reading
No part of this report may be reproduced in any manner
without the expressed written permission of Squared Concept Partners, LLC. Any information presented in this report is
for informational purposes only. All
opinions expressed in this report are subject to change without notice. Squared Concept Partners, LLC is an
independent asset management and consulting company. These entities may have
had in the past or may have in the present or future long or short positions,
or own options on the companies discussed.
In some cases, these positions may have been established prior to the
writing of the particular report. The
above information should not be construed as a solicitation to buy or sell the
securities discussed herein. The
publisher of this report cannot verify the accuracy of this information. The owners of Squared Concept Partners, LLC
and its affiliated companies may also be conducting trades based on the firm’s
research ideas. They also may hold
positions contrary to the ideas presented in the research as market conditions
may warrant.
Saturday, November 8, 2014
Investor Sentiment is Off The Charts!
Several
weeks ago, I wrote a note
explaining why the bottoms that were hit in mid-October were most likely not
the lows for the year. I offered several reasons why that I believed that to be
the case.
I turned out
to be incorrect.
The U.S.
equity markets completely shrugged off any and all concerns regarding the end
of QE, slowing global economies, geopolitical tensions and Ebola and pushed to new
annual highs.
It would
appear the bulls remain in charge but what has really raised an eyebrow or two
is the amount of “skittishness” there appears to be in the market. In my humble
market experience, I can’t recall a time when a correction came and went in
such quick measure. I am shocked at how quickly the market pivoted from
euphoria – to panic – back to euphoria.
Subjectively
speaking, it felt like there was clearly panic in the air. There were so many
that felt this was the beginning of the end of the QE empowered rally that
started in 2009.
I wanted to
take a more objective approach in reviewing this flash correction and started
looking at the five day volatility for the volatility index (vix) since his
rally began. I simply took the range of the five day high and low for the vix
to measure market fear. I found two other instances when the vix swung so
wildly. They were August of 2011 and May of 2010.
On August 9,
2011 the vix swung from 23.38 to 48.00 over five days. On May 7, 2010 the vix
had a five day range of 20.19 to 40.95. On October 14, 2014 the vix had a range
of 15.11 to 24.64.
The prior
two excessive volatility periods resulted in a pullback in the bull market but
offered an opportunity to build positions as the market remained depressed for
a period of weeks and months. This time around, bullish sentiment returned so
quickly that the correction barely registered on a longer-term stock chart.
The wild
swing in the put-call ratio also confirmed the increased skittishness. The
ratio went north of 1.5, the highest level in years as investors sought
downside protection for their portfolios. Then just as quickly the ratio dropped to
around .75 as if nothing happened. On the surface one can call this a
correction but it sure didn’t feel like one.
There are
other extraordinary facts about this latest correction that has many talking.
Taken from the blog The
Fat-Pitch, here are more really interesting points.
“This market is well-known for doing
the unprecedented. According to SentimentTrader, SPX traded more than 0.5%
above its 5-dma for 10 days in a row in the past two weeks. In the prior 75
years, this has only happened twice before, both at bear market lows (1982 and
2002). In other words, a rare rip higher, that has only happened after
multi-year bear markets, just occurred after a mild, four week drop. It's
incredible and completely unexpected.”
More from The
Fat Pitch, “Perhaps the most
distinguishing characteristic of the current rally is this: SPX has made a series
of 12 daily "higher lows" in a row. According to Paststat, there have
been only 9 other instances in the past 20 years where SPX has made more than
10 "higher lows" in a row (post). This raises the question of what
typically happens next.” It turns out that the S&P 500 has struggled or
went lower in 7 of the 9 instances
While
parsing through the numbers, I realized just how CRAZY investor sentiment has
been over the last few weeks.
Last week, the
survey produced 52.7% of respondents saying they are “bullish” towards the
market and only 15.1% claimed to be “bearish. These results are at extreme
levels.
Looking at
the next figure, going back to 1987, there is typically an average spread
between bulls and bears of about 8.5 points, in favor of the bulls. As of the
latest reading, there exists a 37.6
point spread between the two almost two standard deviations from the norm.
Displayed a
different way, I take a ratio of bulls-to-bears. There is historically 1.5
bulls to every bear. The reading from last week shows a margin of 3.5 bulls for
every bear. This is an enormous misalignment to historic norms and should be
considered an outlier.
Another item
to note has been the rate of change from bearish to bullish. Similar to the extreme
moves in the vix and the put-call ratio, the AAII investor Sentiment survey has
seen an aggressive increase from the mid-October correction.
During the
correction, the bulls-to-bears ratio was around 1.2 and spiked to 3.5 in four
weeks. The last time we saw such rapid changes in the survey was late 2005 into
early 2006.
While our
call from several weeks ago turned out to be erroneous, we are still cautious
for the outlook on equities. While it is difficult to tell how effect the post-election euphoria skewed these figures our belief is that this pendulum will swing in the opposite direction
at some point.
Joseph S.
Kalinowski, CFA
Joe@squaredconcept.com
No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Partners, LLC. Any information presented in this report is for informational purposes only. All opinions expressed in this report are subject to change without notice. Squared Concept Partners, LLC is an independent asset management and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed. In some cases, these positions may have been established prior to the writing of the particular report. The above information should not be construed as a solicitation to buy or sell the securities discussed herein. The publisher of this report cannot verify the accuracy of this information. The owners of Squared Concept Partners, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas. They also may hold positions contrary to the ideas presented in the research as market conditions may warrant.
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