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Trader's Corner 2007

Discussions about the economic and financial ramifications of PEAK OIL
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Where will WTI crude be on DEC 31st 2007?

Poll ended at Thu 19 Apr 2007, 04:20:21

under $50 per barrel
5
No votes
around $55
0
0%
around $60
5
No votes
around $65
12
No votes
around $70
11
No votes
around $75
28
No votes
 
Total votes : 61

Re: Trader's Corner 2007

Unread postby MOCKBA » Tue 09 Oct 2007, 22:40:45

$this->bbcode_second_pass_quote('MrBill', 'U')PDATE: Kazakhstan looks like it is getting ready to implode based on a steep correction in real estate and over-exposed lenders.


This has been in works at least since mid-summer and basicly goes like this... Kazakh banks borrow in EUR and USD in Europe then lend out in local currency. Locals with almost no income go out and buy camcoders and such on credit (hey the benefits of the easy credit did hit emerging markets too) go to pawn shop next door and sell it pennies on the dollar. Banks keep on adding up those late charges and keep on sending out angry mail, but like Samuel L Jackson put it in Jungle Fever - "I smoked the TV"... then it turns out those European banks have difficulties on their own so they cannot extend more credit to Kazakh ones and currency goes, so now those borrower have to pay not 25% APR but 250% but what do they care - they "smoked the TV"... So who would be left holding the bag?

Kazakhstan to Russia is what Canada to US - who would care, but... once it would start imploding one after another who would end up holding the bigger bag? and more importantly where would implosion stop? According to Soros somewhere around 0C isoterm or where allied troops met during WW-II. That is as far as Europe... Asia and Latin America are different.
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Re: Trader's Corner 2007

Unread postby MrBill » Wed 10 Oct 2007, 03:46:05

$this->bbcode_second_pass_quote('MOCKBA', '')$this->bbcode_second_pass_quote('MrBill', 'U')PDATE: Kazakhstan looks like it is getting ready to implode based on a steep correction in real estate and over-exposed lenders.

Kazakhstan to Russia is what Canada to US - who would care, but... once it would start imploding one after another who would end up holding the bigger bag? and more importantly where would implosion stop? According to Soros somewhere around 0C isoterm or where allied troops met during WW-II. That is as far as Europe... Asia and Latin America are different.


Thanks MOCKBA. Kazakhstan is, of course, important as the canary in the mine shaft. They, at least externally, seemed to be growing due to stable financials and on the back of strong oil & gas exports. Not unlike most of the rest of the EM universe. At least that was what foreign investors wanted to believe. However, as long ago as a year now the Head of the IMF responsible for that part of the world told me that 'despite large inflows of capital into Kazakhstan it was not showing up on the other side as output.' That usually means it is being siphoned off or is already being used to hide bad loans. Neither of which is desirable.

What is the fall-out? Aside as a warning about how superficial growth in the real economies of these countries are when it is hidden by high commodity prices in a strongly growing global economy there are local and regional impacts. One, I know one Kazakh bank has pulled its bid for the take-over of a Russian one. That seeds uncertainty.

Also, I know that some Austrian banks have been in the process of buying Kazakh banks. Did they pay too much? Do they know what is on the balance sheets of these banks? Would it have been better to wait for the local market to implode and then swoop in with rescue offers?

In the big scheme of things the Austrians are small fish, but they run the biggest banking networks in central and eastern Europe, so they are exposed to trends there like bank failures in Kazakhstan or large current account deficits in Hungary when global credit markets are getting a lot stingier. As one Austrian banker once told me, 'it is easier to buy an asset than to fund it.' Yes, indeed.

And in general the German banks, for example, are really not in a position to step into CEE as a backstop either. Their own balance sheets are not that strong; they are not sitting on piles of cash; and their credit ratings are already single A/A- so raising the necessary cash in equity or bond markets would not come easy or cheap. Other would be buyers like HSBC, Citi, the Dutch or the Belgiums all have their own problems at the moment. The Skandis lack deeper eastern European expertise. There would not be much risk appetite from these players to step into a regional market slump.

Sovereign wealth funds? Yes, they have the cash, but they lack the expertise to run these shops under difficult market conditions in harsh operating environments. Skills the Austrians have picked up over the past decade or more now.

For some more worries about how robust emerging markets are and how much of the global burden they can shoulder here is a good article today in the FT.com.

$this->bbcode_second_pass_quote('', 'F')or the first time, emerging markets are a safe haven during a global financial shock emanating from the world’s hegemonic economic power. How times have changed and how, indeed, have the mighty fallen!

Ironically, today’s financial strength in emerging economies is a mirror image of US weakness. Charles Dumas of London-based Lombard Street Research brings this point out in an analysis with which I have great sympathy.* The global balance of payments sums to zero. If emerging economies have chosen to run huge current account surpluses, partly because they bear deep scars from the financial crises of the 1990s and partly because they wish to conserve revenue from the soaring prices of the commodities many of them export, then someone else must run deficits.


Source: Big challenges lie ahead for the emerging economies

Here is the background link from
Lombard Street Research - The World on the Cusp
although I have not had a chance to read it, yet.

At least Goldman Sachs is still bullish the underlying commodity markets. They have been mostly right up to now. No reason to doubt their forecasts, but I suppose it all depends on your view that the world economy has decoupled from the USA, and whether we can expect a recession in 2008? If high commodity prices are just the mirrow image of a USD devaluation, and EM central banks move to keep their export revenues sterilized, then it is just high inflation and not high real commodity prices or sustainable growth for these economies. Although, I suppose you can argue so long as you're hedged you're not worse off? And better than not being fully hedged against re-surgent inflation?

$this->bbcode_second_pass_quote('', '
')Commodity Watch

Strong commodity returns expected to continue

We maintain our forecast for year-ahead S&P GSCITM total returns at 12.3% and continue to recommend an overweight energy position relative to non-energy.

Commodities performed exceptionally well in September

As expected, S&P GSCITM total returns performed exceptionally well in September, consistent with tightening fundamentals across much of the commodity complex that lead us to remain constructive. A severe economic slowdown remains the key downside risk.

We expect further strong gains from energy

We continue to expect further strong energy returns as the market deficit continues to push oil inventories to lower levels, which we believe will generate further price appreciation and sustain the recent strong backwardation in the oil futures curves.

Demand and supply factors should lend further support to metals

We expect further strong returns from industrial metals as the combination of robust demand from emerging economies, slower supply growth, and still-low inventories will likely lend support. In addition, we believe that gold price risk remains skewed to the upside in the near term.

Opportunities remain in parts of the agriculture complex

We believe that attractive investment opportunities remain in parts of the agriculture complex, especially corn and soybeans, despite our view that current very high wheat prices are unsustainable in the medium term.


Source: Goldman Sachs Commodities Research
October 9, 2007

The pessimist in me is still waiting for the Bull Trap to spring and then I hope a severe correction will open up much better entry levels than we are seeing now in the business as usual euphoria following the Fed's decision to accommodate credit markets.
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Re: Trader's Corner 2007

Unread postby MrBill » Fri 12 Oct 2007, 03:44:45

$this->bbcode_second_pass_quote('', '
')MrBill wrote:
$this->bbcode_second_pass_quote('', 'T')he pessimist in me is still waiting for the Bull Trap to spring and then I hope a severe correction will open up much better entry levels than we are seeing now in the business as usual euphoria following the Fed's decision to accommodate credit markets.


You certainly nailed it in that one sentence. Me too. I'm in full agreement with you.

Since last June, I've said SEP '07 was the time to sell and after the OCT correction a nice buying opportunity will be delivered. Well, OCT is still young. Irrational exuberance seems to have recently infected the markets. Rising personal debts, liquidity crisis, slowing retail sales, slow home sales, home depriciation, rising energy prices... etc... and yet new market records are set worldwide. To me this is a perfect scenario for a nice big market 'correction'.

I sold everything mid-SEP (a few weeks early maybe) and am patiently waiting to pounce.....

Thanks for your input.


Well, I am quite frustrated that the central banks rode to the rescue of the markets so quickly that we did not have a deeper correction in August.

I have also sold-out too early and now I am rue to get back in at these levels. But the reality is that we may continue to melt-up as the Fed and the Treasury choose US dollar devaluation and higher inflation over a recession. In this sense the stock market is just keeping pace with that debasement. And the ones that are really being punished are those of us that are on the sidelines in cash - that is losing its buying power - or buying government debt that is rapidly inflating.

I think it is very telling that a retired Greenspan is only now coming clean with all his revelations about seeing interest rates of 10% going forward, while PIMCO's Bill Gross calls this 'the last bond bull market of his lifetime', which seriously sounds like he also getting for a curtain call of his own.

There are many reasons to be worried about a recession and choosing higher deficits, a lower dollar and stronger inflation to combat that necessary correction in over-valued assets is not good public policy to say the least. It can at best delay the hour of truth. As Thomas L. Friedman writes today in the NYTimes, Generation Q is at risk of working for China Inc. for the next twenty years to pay for the prolifigate spending and utter lack of self-control by The Greed Generation.

Generation Q

A tapped out consumer that is still piling on credit card debt to maintain spending is quickly running out of breathing room now that housing prices have stopped rising and are starting to fall. I think that Q2 corporate profits were at their zenith and that this quater's earning season will start to disappoint as cost pressures and slower growth start to catch-up to firms' bottom lines. And yet markets may continue to frustrate bears if all that negative news is offset by public spending and policies designed to mask over obvious weaknesses in the real economy. Again that is only postponing the inevitable day of reckoning. But we can only be patient. We have to remain solvent as well as rational.

Have a nice weekend. Cheers.
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Re: Trader's Corner 2007

Unread postby eastbay » Fri 12 Oct 2007, 11:48:01

This is a valid question facing many individual investors who cashed out in SEP thinking stock and commodity prices are getting inflated a bit. Now look at them!

But again today, the fundamentals are essentially unchanged yet stocks keep roaring ahead (as of 11am eastern 10/12). I have a funny feeling we're in for a harder fall the higher it gets.

Inflation's impact on what we personally buy is minimal. Everything is paid for. All I have to do is keep the cupboards filled and the lights on. The only erosion is to our 401k, which is now paying us 5.1%, which isn't that bad of a place to rest while waiting out this irrational market advance. At 54 yrs old I don't want to risk the nice pile we've accululated thus far. I enjoyed a monster increase in energy since last OCT '06 and getting too greedy is never good. If I miss out on this recent peculiar market move only to avoid suffering in the coming correction I'll be happy.

I'll jump in full-blast when it falls, however. Oil Svc and Nat gas. 50/50. That's the next big increase IMO.
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Re: Trader's Corner 2007

Unread postby MrBill » Mon 15 Oct 2007, 05:55:21

One source of funds to keep this rally humming along. You just gotta love the idea of glorified civil servants speculating with their citizens nest eggs in financial markets.
$this->bbcode_second_pass_quote('', 'M')errill Lynch economists expect this wave of extra liquidity to benefit world financial markets. Sovereign Wealth Funds (vehicles mandated by governments to manage reserves) are likely to direct far greater allocations towards riskier assets such as equities and corporate bonds with cumulative net flows of US$3.1 trillion to US$6 trillion into these asset classes. SWFs are also likely to mandate external fund managers to invest the bulk of their assets - providing a major structural boost for the global asset management industry.

Source: [url=http://www.marketwatch.com/news/story/story.aspx?guid={B889465D-5DAF-420C-AD75-5AC1AC9F0CE3}&siteid=nbs&symb=]Sovereign Wealth Fund Assets to Quadruple by 2011[/url]

And something a little less sexier.... in the search for Alpha.
$this->bbcode_second_pass_quote('', 'I')nvestors planning to move beyond equities, property and bonds might want to consider a rather macabre investment in the second-hand life assurance policies of elderly and dying Americans.

In times of market volatility and rising interest rates, US traded life policies (TLPs) are an increasingly attractive asset for top-tier banks such as Goldman Sachs, Barclays, Deutsche Bank and Credit Suisse. This suggests that private investors should take a look at them as well.

Returns on these assets, which tend to rise even in falling markets, are predictable in the long term as the value of life insurance policies is known and the price paid for policies discounted.

The way it works is that funds invest in a group of say, 100 of these policies, continue to pay the premiums, and then cash in when people die.

Source: Cash in on the American way of death

But back to our meat and potatoes... or energy pie as the case may be?
$this->bbcode_second_pass_quote('', 'E')nergy Weekly

Rare 3Q2007 draw reinforces potential for winter price spike

Weather, not economic growth, presents largest price risk

Crude prices reach record highs following supportive data

Oil prices increased sharply this week with WTI and Brent reaching new record-high nominal levels on Friday, as an initial sell-off on Monday on the back of some fund liquidation quickly reversed after the release of several supportive data points. The data confirmed a strong global counter-seasonal inventory draw in 3Q2007, which we maintain sets the stage for a very tight 4Q2007.

Increasing backwardation and rising long-dated prices suggest price risk remains skewed to the upside

The tightening fundamentals have continued to lend support to oil
timespreads, which we expect to strengthen further as inventories continue to draw. The recent strength in timespreads has been even more impressive given that long-dated oil prices have increased to record-high levels, with WTI for delivery in five years rapidly approaching $75/bbl. This increase is consistent with persistent industry cost inflation. The continued structural rally in long-dated prices will likely magnify the impact on spot prices of
the year-end inventory draw and the resulting increase in backwardation, underscoring the risk that spot oil prices spike above $90/bbl by year end.

Weather, not economic growth, presents largest price risk

We continue to believe that a stronger-than-expected economic slowdown in the world economy poses a substantial downside risk to our price forecast. However, it is important to emphasize that winter weather represents a far more important risk factor that can substantially impact oil prices both to the upside as well as to the downside.

Source: Goldman Sachs Commodities Research
October 12, 2007

More bread and butter issues...
$this->bbcode_second_pass_quote('', ' ')
Agriculture Comment

Wheat is tight, but beans and corn are our favorites

The October WASDE confirms tightness in the wheat market, which we believe is largely priced in, but opportunities remain in soybeans and corn.

Raising our near-term forecast for soybeans...

While the WASDE made few substantive changes to soybeans from last month, the moderation of concerns over the credit crisis, confirmation of robust emerging markets growth and the reconfirmation of our above-market fair-value estimates lead us to raise our near-term forecast to 1100 cents/bushel , while leaving our year-ahead forecast unchanged at 900 cents/bushel.

... and maintaining our bullish outlook for corn...

This month's WASDE showed a large increase to US ending stocks for corn, but this was due to reductions in projected feed and ethanol demand. We think feed demand could surprise to the upside in the near term, while the USDA's ethanol assumption is now falling closer to our original estimate due to infrastructure constraints.

...but the wheat market looks like it has already priced in tight
fundamentals

The USDA has acknowledged tightness in the wheat market by
reducing Australia's production and the call on the wheat market for feed demand, but this has already been priced into the market, in our opinion.


UPDATE: Is the G7 useless? HAHA! What a question? Of course, they are! Italy, but no India? Canada, but no China? If one wanted to really reform the G7 it might conceivably look like G7 + BRICs, but even then it would ignore the reality of those sovereign wealth funds mentioned above who increasingly call the shots with regards to currency and asset markets, not tapped out, discredited Min Fins. Not to mention the oil producers. And even then those who are building those enormous external reserves through currency maniplulation have other priorities than helping out their rich world brethren.
$this->bbcode_second_pass_quote('', '"')It is better late than never to get on the train and try to balance adjustments," Bergsten said.

Bergsten said he would not be surprised to see further upward adjustment of the dollar to $1.50 or $1.60 if China were to continue to block appreciation.

Carl Weinberg, chief economist at High Frequency Economics, said European leaders would get the same treatment about yen appreciation as U.S. officials have.

"European finance ministers can moan all they want about economic evidence of yuan overvaluation. Chinese President Hu Jintao has more important problems on his plate to be concerned about helping out European finance ministers with their currency agendas," Weinberg said.
Source: Slumping dollar puts G7 back in spotlight

Source: Goldman Sachs Commodities Research
October 12, 2007

$1.50-1.60 is going to make skiing in France and Italy expensive this winter, but I have to do my best to help them out in any case. Someone has to eat their tasty food and drink their wines! ; - )
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Re: Trader's Corner 2007

Unread postby MrBill » Tue 16 Oct 2007, 08:21:12

Ericsson shares are down 30% today in Sweden on a missed profit report that is also undermining support for telecoms like Alcatel-Lucent in France (-6.2%) and Nokia in Finland (-2%). That may put to bed the widely held view that the rest of the world will decouple from problems State-side and learn to shake-off high energy and commodity input prices without any effect on margins.

$this->bbcode_second_pass_quote('', 'R')ussia's central bank bought back 46 billion rubles ($1.8 billion) of government bonds three weeks ago at above-market prices, a sign of turmoil in the nation's money markets, Kommersant said.

The Bank of Russia purchased the debt to relieve stress in the banking system, the Moscow-based newspaper cited central
bank Chairman Sergei Ignatiev as saying.

The bonds were bought at about 2 percent above market prices, the newspaper said. ``Long-dated'' debt traded between 1.5 percent and 3.5 percent higher for several days after the transaction, it added.

The last time the Bank of Russia bought government bonds was during the banking crisis of June 2004, Kommersant reported.

Source: Oct. 16 (Bloomberg)

It is like a web. If you tug on one side the whole web moves. Sometimes more, sometimes less, but it is dynamic and not static. With all asset prices at the high end of their historic ranges, or objective values, it all comes back to liquidity. High prices due to strong demand are when some prices are up, while others are down. Inflation is when all prices are high at the same time. And the world's central banks are just starting to embark on a more neutral monetary policy as opposed to actively tightening. Is anyone surprised?

$this->bbcode_second_pass_quote('', '
')Despite Crude at $86.13, Producers' Earnings Curbed By Costs, Refinery Squeeze

• The Issue: Despite record oil prices, many oil companies are expected to post a drop in their third-quarter results.
• In a Pinch: Profits are being squeezed by higher costs and tougher terms from oil-rich nations. Also, a narrower difference between the price of oil and fuels like gasoline hurt refining results.
• The Outlook: Oil companies will have to become more efficient to capture the benefits of higher oil prices amid a tougher operating environment.

Source: Oil Prices, Profits Set to Diverge p.s. The Wall Street Journal is free today.
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Re: Trader's Corner 2007

Unread postby Doly » Tue 16 Oct 2007, 09:59:23

$this->bbcode_second_pass_quote('MrBill', 'E')ricsson shares are down 30% today in Sweden on a missed profit report that is also undermining support for telecoms like Alcatel-Lucent in France (-6.2%) and Nokia in Finland (-2%). That may put to bed the widely held view that the rest of the world will decouple from problems State-side and learn to shake-off high energy and commodity input prices without any effect on margins.


I see this as another indication that the theory that the credit crunch is a collateral is correct. No need to worry about whether the turmoil in Wall Street may hit Main Street, because it was the beginning of trouble in Main Street what hit Wall Street.

Consumers are at the end of their borrowing tether. Telecoms are mostly luxury products and one of the first things to fail when consumers are short of money (I learned this the hard way by losing my first job in the UK, working for an electronics company).

The idea that Europe may be able to decouple from the problems on the other side of the Pond is ridiculous, among other things because they have many of the same problems, though in a less advanced form.

Also, the reason that high energy and commodity input prices haven't resulted in higher output prices in many manufacturers is because the difference was covered by borrowing. Why do you think that companies credit ratings have been falling steadily? And now we know that credit ratings are sometimes over-optimistic.

In short, I feel very happy I just put all my money into a rather solid asset. Steel-solid, in fact. I just bought a steel hull houseboat!
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Re: Trader's Corner 2007

Unread postby MrBill » Wed 17 Oct 2007, 04:58:17

You're right in many ways, Doly. Most economic expansion or contraction happens at the margin. Therefore to say that Country A only does 10-15% of their trade with Country B usually overlooks that they are doing 85-90% of their trade then with Countries X, Y & Z that trade with Country B either directly or through Country C. At the end of the day all trade is a zero sum gain. If your country is growing say 2-3% per year then losing 10-15% has to hurt someone. And if it hurts someone it hurts the aggregate demand as well.

UPDATE: some amazing photos on climate change
Reuters Pictures
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Re: Trader's Corner 2007

Unread postby MrBill » Fri 19 Oct 2007, 04:14:27

[align=center]The best article I have read so far today[/align]

$this->bbcode_second_pass_quote('', 'T')he problem confronting policymakers is that the financial system is so integrated that banks and other investors can easily straddle borders – picking and choosing regimes or playing one off against another.

Most banks have stopped retaining credit risk on their own books, instead slicing and dicing some of it into securities that can be sold to other, largely unregulated, investors such as hedge funds that operate globally. This has made it hard for regulators to work out where this risk has gone or how investors might behave under stress. Some observers conclude that regulators will need to collect far more data from non-bank players – or perhaps demand more transparency in opaque corners of the market. But there is little appetite in the US for a wider clampdown on hedge funds.

One key issue for reform is how banks handle their liquidity needs. Another is the accounting treatment of investment vehicles that partly lie off banks’ balance sheets – such as structured investment vehicles and conduits. Prof Hagerty says: “It’s hard to value them accurately, because they are not exchange-traded, so there is no ready price. I can’t see what good comes from keeping things off-balance sheet in terms of the clean running of the markets.”

Others argue that banks should be forced to post capital reserves against loans they have sold on, if they have retained a reputational risk or other links. “This is an area where there needs to be some more debate,” says David Dodge, Canadian central bank governor.

Source: The anatomy of a crash: What the market upheavals of 1987 say about today

Have a nice weekend. Cheers.
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Re: Trader's Corner 2007

Unread postby eastbay » Fri 19 Oct 2007, 13:07:14

Quickly here... after what we're seeing today (Friday) I think next week will be very volatile. This is pattern we've seen before. A sizeable downturn on Friday followed by a huge downturn the following Monday.

I would not want to be heavily loaded up when the market closes today. All major factors point to a downturn. High energy prices. Housing market chaos. Liquidity situation unstable. Banking stocks weak. Unemployment ticking up. Public and private debt moving ever higher.

It's strange to see the markets holding up against this pressure.
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Re: Trader's Corner 2007

Unread postby pup55 » Fri 19 Oct 2007, 13:38:54

Seeking Alpha

$this->bbcode_second_pass_quote('', 'C')rude Oil Now Seriously Overbought - Expecting Declines


Another stat nerd is flashing us a warning sign.
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Re: Trader's Corner 2007

Unread postby Mechler » Fri 19 Oct 2007, 19:43:27

Yep,

A big down day for energy stocks, not the least of which was SLB who beat earnings and still shed 11%. Next week could be rough - who thinks it will be a good buying opportunity? Maybe after black Monday...
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Re: Trader's Corner 2007

Unread postby MrBill » Mon 22 Oct 2007, 04:04:02

$this->bbcode_second_pass_quote('Mechler', 'Y')ep,

A big down day for energy stocks, not the least of which was SLB who beat earnings and still shed 11%. Next week could be rough - who thinks it will be a good buying opportunity? Maybe after black Monday...


[align=center]Has the Bull Trap Sprung?[/align]

Asia is opening up (Monday morning here) 2.5-3.0% down. So certainly the events of Friday are weighing on sentiment. The list of casualties range from oil cos., airline stocks to financials. Especially as HSBC downgraded. But putting fundamental reasons aside I just want to focus on the technicals today for a broader overview.

First of all Friday's move (or the combined move of last week) has put clear reversal patterns in place in many of the benchmarks that I watch. That can be both a positive and a negative actually. On the positive side, looking at trade envelopes (TE)* and RSI measures, actually Friday's action took many of the benchmarks from over-bought back into fair value territory. Technically that could set them up for a rally if the market started to believe that Friday's market jitters might sway the Fed into cutting rates again on October 30th. But I do not buy it. I think this is a reversal with more to come.

EURJPY, my favorite measure of global risk appetite, has clearly reversed. The absolute high was 168.96 before it dropped to 149.25 in August. Since then the yen carry trade has clawed its way back up to 167.75. And now we are in a correction as those trades get closed out.

0.236R = 163.40 achieved
0.382R = 160.69 next target
0.500R = 158.51
0.618R = 156.32

TER = 167.37
TES = 161.92
RSI = 48.83 (back into fair value)

Crude (WTI) rallied from $68.55 to $90.05. Now it looks like it would like to take a break, but it is still above its daily moving averages (M/A) so it is a high risk sell at these levels. None the less the retracements are

0.236R = 85
0.382R = 81.85
0.500R = 79.30 (the top of the last rally)
0.618R = 76.75 (a year end target?)

TER = 89.65
TES = 76.35
RSI = 67.55

UPDATE:
$this->bbcode_second_pass_quote('', 'A')n alternative count appears when you start at the previous low of $49.65 to $90.05. It is

0.236R = $80.65
0.382R = 74.70
0.500R = 69.92
0.618R = 65.15

Generally, we will count the Fib retracements for the most recent moves, say on the daily chart, before looking at the larger Fib retracements on the weekly or monthly charts. The reason being that the levels may be nearer to current market prices and because newer cycles may be more potent in investors minds as opposed to older, long-term trends. You cannot really afford to ignore either if you want the whole picture.


Gold that has clearly benefited from a weaker US dollar may also take a breather here. If so the retracements of the rally from $641 to 770 are

0.236R = 739.50
0.382R = 720.70
0.500R = 705.45
0.618R = 690.25

TER = 769.39
TES = 719.61
RSI = 65.29

The S&P 500 (GSPC) climbed to 1576.35 after falling from 1555.85 to 1372 in the middle of August. It was only spared further declines once the Fed started dropping rates. That magic may have run its course. Now from the new highs the retracements are

0.236R = 1528.10
0.382R = 1498.25
0.500R = 1474.15
0.618R = 1450

TER = 1573.10
TES = 1507.22
RSI = 40.17 (back into fair value range after Friday's correction)

The S&P Energy Index (GSPE) rallied strongly from a low of 485 once the Fed started cutting rates. It topped out at 604.35. I bought into that rally, but then took profit much too early. I missed the bulk of the move since mid-August unfortunately. However, now it looks like the worm has turned, so maybe we will see better entry levels going forward? The retracements are

0.236R = 576.25
0.382R = 558.80
0.500R = 544.75
0.618R = 530.65

which still leaves us higher than the 485 starting point, so if you are a real energy bull this kind of discourages one from focusing too much on market timing and instead just sticking to a core strategic position.

TER = 600
TES = 525
RSI = 49.15 (fair value)

So the conclusion is that gold and oil are still in over-bought territory, but to be fair they are benefiting from a weak US dollar. Fundamentally, the dollar deserves to be weak and is probably desirable from a trade and current account perspective and the prospect of lower interest rate differentials vis a vie the euro.

Other than that the corrections of Friday have brought some benchmarks like the S&P500 and S&P Energy Index back into fair value territory. That means that we can still see some selling pressure today, as Friday's losses have sunk into mainstream thinking over the weekend and on the back of a weaker open in Asian stocks, but it ain't nessarily so from an over-bought or over-sold perspective.

Has the Bull Trap finally sprung? It is too early to say from a technical point of view, but the reversals are in place. From a fundamental perspective we can certainly find enough reasons to be pessimistic as climbing the Wall of Worry by the contrarians all of a sudden can become a Panorama of Panic for the majority. On the daily chart it looks like the back of the rally since August has been broken, but all the pieces are not yet in place for a rout. No yet in any case.


*TER = TE resistance
TES = TE support
R = retracement
RSI = Relative Strength Index
>60 = overbought
<30 = oversold
Fibinochi Retracements
23.6%
38.2%
50%
61.8%
M/A = 13-day and 21-day moving averages
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Re: Trader's Corner 2007

Unread postby MrBill » Tue 23 Oct 2007, 05:14:28

Just a quick update because I am leaving tomorrow for London and Moscow back next week. Too many things here to do today.

$this->bbcode_second_pass_quote('', 'E')nergy Weekly

Despite recent price correction, market nearing key upside threshold

Crude oil prices retraced from all-time highs on economic concerns

Crude oil prices retraced modestly in recent days from record-high nominal levels reached last week as more weak housing data and negative earnings surprises that resulted in a sharp equity market sell-off reignited concerns over economic growth and, in turn, oil demand growth. Exacerbating these concerns has been a substantial weakening in refinery margins in the recent period as petroleum product prices have underperformed crude oil prices.

"Crude-driven" market puts pressure on refinery margins

Although weaker refinery margins have generated concern about end-user demand for oil, it is important to emphasize that the decline in refinery margins has been in large part seasonal and the extent to which weakness has exceeded seasonal norms has resulted from exceptional tightness in crude oil fundamentals rather than softness in product fundamentals. In other words, the market has shifted into a "crude-driven" environment from a "product-driven" environment of recent years. Recent data releases that provide more evidence of tightening crude fundamentals underscore this shift.

The oil price has moved into "negative gamma" territory

We believe that crude oil prices remain consistent with current supportive fundamentals but vulnerable to the downside in the near term as weaker refinery margins potentially motivate refiners to reduce their demand for crude. However, downward price pressure on crude oil prices will likely prove temporary as the relatively low level of product inventories suggest sustained refinery run cuts are unlikely and as crude oil fundamentals remain tight. Further, it is important to note that the concentration of call
options at $90/bbl and $100/bbl suggest the potential for a "negative gamma" effect to push prices sharply and rapidly higher should these key thresholds be reached.

Source: Goldman Sachs Commodities Research
October 23, 2007

I am not much of an options trader, but so far as I understand gamma is that it is the change in delta over a one point move in the underlying stock. So in other words when an option is deep in the money (ITM) there is almost a one to one move in the price of the underlying future and the price of the option. Say a $70 call when crude is $90 for example. The price of the option would be less effected by time value or the cost of money close to maturity as by its depth ITM. Delta would be approaching 1.

Good luck and speak to you next week. Cheers.

UPDATE: I do not agree with his conclusions about our energy mix or reliance of petroleum, but worth a read to make up your own mind.
$this->bbcode_second_pass_quote('', 'T')he drop in the price of oil for November delivery from just over $90 a barrel on Friday to less than $87 on Monday could be the start of something big.

Source: [url=http://www.marketwatch.com/News/Story/Story.aspx?guid={571A4D73-EA63-4C68-A9BE-0CBA9D5BB1FD}&siteid=nbi]Has another bubble popped?[/url]
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Re: Trader's Corner 2007

Unread postby Mechler » Tue 23 Oct 2007, 12:12:55

MrBill,

Thanks, as always, for the great analysis. It's almost as if you do this for a living or something :P

It's interesting that crude is overbought and the GSPE is at fair value (probably oversold after yesterday). Any insight into that?

You've summed up my sentiment when you said this:

$this->bbcode_second_pass_quote('', '.')..so if you are a real energy bull this kind of discourages one from focusing too much on market timing and instead just sticking to a core strategic position.


Thanks again,

Mech
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Re: Trader's Corner 2007

Unread postby MOCKBA » Wed 24 Oct 2007, 00:43:55

$this->bbcode_second_pass_quote('MrBill', 'K')azakhstan is, of course, important as the canary in the mine shaft. They, at least externally, seemed to be growing due to stable financials and on the back of strong oil & gas exports. Not unlike most of the rest of the EM universe...


If Kazakhstan is a canary... Russia is part of BRIC... Some people did some research and figured that starting last summer Russian banks could hope for 6% profitability at best in certain areas of banking business... that's with inflation around 10%... Clearly, doing no business and just safeguarding the capital became beter proposition... So since they cannot borrow in Europe anymore they started doing what they have to do - call in as much loans as they could and issue as little as possible. As a result there is no money neither to finance construction of another VW dealership, neither to finance purchases of those VWs...

Behind the scene EM are emploding already and it doesn't matter if they supply Europe with NG and oil, cheap plastic or textile... The system is rigged to collapse from outskirts preserving the center.
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Re: Trader's Corner 2007

Unread postby idomar » Fri 26 Oct 2007, 07:13:48

I have a question about 'shorting the oil market'!

Lets say that there are fund managers out there that believed in the 'fundamentals' and bet on the market going down. Do they need to fill the options contract by going into the market and buying more stock or can they let the options lapse?

If they have to buy in oil to fill their obligations, i assume that this will be at spot price, this will have a positive impact on the oil price........but, and i guess this will be hard to know, how large, if any is this total 'short exposure'?
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Re: Trader's Corner 2007

Unread postby MrBill » Wed 31 Oct 2007, 05:48:35

$this->bbcode_second_pass_quote('idomar', 'I') have a question about 'shorting the oil market'!

Lets say that there are fund managers out there that believed in the 'fundamentals' and bet on the market going down. Do they need to fill the options contract by going into the market and buying more stock or can they let the options lapse?

If they have to buy in oil to fill their obligations, i assume that this will be at spot price, this will have a positive impact on the oil price........but, and i guess this will be hard to know, how large, if any is this total 'short exposure'?


It is dangerous to generalize because as fund managers have matured many have gone straight into trading physical markets as opposed to simply restricting their views to futures and options.

This is partially to have inside information on the 'real' supply and demand fundamentals, so even if they are not successful cash traders per se they gleen important insights by lifting back the curtain. And also this avoids some of the pitfalls of being merely a paper investor like long only funds and ETFs that can be right in their macro or beta view, but lose alpha due to somewhat archane details such as losing money on the roll if the futures market is in contango.

However, you are right in principle. If a fund expresses their short-view by selling futures then they either need to buy back those options ahead of maturity or deliver crude into the physical market. Both create short-term demand. But looked at from the other side, even if you are long, you need to either sell ahead of contract maturity; roll your long into the next month out; or take delivery of the phycial crude and then pay for storage and other costs.

So net/net the front end of the futures curve does not affect real supply and demand per se, but of course they are related in many important ways like short squeezes where shorts are forced to buy futures as per your comment. That might not affect prices long-term, but certainly near maturity it can have an effect.

Especially in stranded markets like the WTI crude contract on the NYMEX. Basically, it is very disceptive. It is a small market for light, sweet crude delivered locally, but it also serves as a global benchmark on which many ETFs and long-only funds are measured. But the bulk of the crude market is not only not in the USA and also not based on WTI, but based on blends like Brent or heavier, more sour grades of crude like Buzzard, Urals, Dubai or even based on Upper Zakum. Platt's makes it living out of publishing the supply and demand fundamentals for such grades at various delivery points around the globe. The price we routinely see on the WTI on the NYMEX is just a proxy for all those other physical contracts.

Of course, if the fund expressed its view by buying OTM puts on crude they would not have to do anything to cover that synthetic short as the buyer of an option has the right, but not the obligation to execute on maturity if the option is ITM. On the otherhand if the option seller or writer is delta hedging his option exposure then he would have to be selling futures contracts ahead of the maturity to stay hedged. So like a spider web the physical market affects the market for futures and options by degrees of separation.

The largest benchmark is the GSCI which is overwieght energy and within the energy component overweight WTI crude. I believe it makes up 50% of 50% or 25% of the GSCI. That is important because investors who may be buying protection against higher commodity prices are actually very exposed to a stranded market for oil within the local US market. By comparison the GSCI is only invested 5% of 50% or 2.5% in Brent futures traded on the ICE. The ICE contract is just as large as the WTI contract on the NYMEX. Therefore there are some concentration issues with this benchmark. I can post the various components later. I just do not have them in front of me right now.

So when Goldman Sachs starts taking profits on their long WTI position, and suggesting investors do likewise, that will have an effect on the WTI directly and indirectly as the GSCI is so over exposed to the WTI in its weighting. And because so many funds are either invested in the GSCI directly or use it as their own benchmark.

$this->bbcode_second_pass_quote('', ' ')
Energy Weekly

Time to take profits as risks are more balanced

The risks of US$95/bbl oil that we highlighted back in July have been mostly realized and as a result we believe that the price-risk profile is now more balanced. Though we remain long-term positive on commodities, we are near-term cautious, and would view price dips as buying opportunities.

Closing long oil and related agriculture and gold recommendations

Although we remain structurally positive on the market as industry cost inflation continues to support long-dated oil prices and the expansion in production capacity is still lagging, we are now more cautious on the near-term upside potential for oil prices. Accordingly, we recommend taking profits and are closing our long WTI and related long agriculture and gold positions. We are not trying to call a top here, just take profits, as prices could continue to rise above US$100/bbl in the coming weeks, but the recent
strong rally will likely bring forward the short-term rebalancing of the market that we expected for the first quarter of next year.

Price risks are now more balanced

We believe that the risks are now becoming more balanced and that the downside risks we have embedded in our end of first quarter 2008 oil price target of US$80/bbl are beginning to gain momentum. These include increasing exports, a slowing US economy, an adequate level of heating oil inventories, the end of field maintenance in the Arab Gulf, the potential for run declines in China due to price caps that have squeezed margins, tightening monetary policy outside of the US, and already heightened geopolitical tensions that could worsen. Though we don't expect these shifts to create a significant pull-back in prices until after the winter, they are beginning to reduce some of the upside risks in the market.

We remain long-term positive and recommend buying on dips

We remain longer-term positive on oil, agriculture and gold and would view price dips as opportunities to re-establish long positions. We are six years into the current investment phase and very little spare capacity or new greenfield production capacity has been added, which underscores how much longer this investment phase will likely last. We believe that it has at least another 5-10 years left and has run into significant road blocks.
Source: Goldman Sachs Commodities Research
October 30, 2007

And on other commodities a similar warning....
$this->bbcode_second_pass_quote('', '
')Commodities Weekly

Base metals rally delayed to second half of 2008

We expect base metals to remain range bound through mid-2008 on greater than expected weakness in the US acting as a drag on a still-strong China, but still see a rally by the end of 2008.

We are reducing our near term price path, but have left our end of 2008 targets unchanged

The basic themes to our base metals thesis remain intact. As demand is expected to recover by the second half of 2008, the market will likely find once again that inventories are inadequate to buffer against continued supply disruptions. In the near term, however, Chinese consumers will likely continue to enter and exit the market on dips and rallies and thus keep markets broadly sideways.

Recent economic activity has been softer than expected...

Our Global Leading Indicator has recently turned down, and US housing and auto markets have yet to show signs of a bottom.

... But that doesn't mean demand will be soft indefinitely

Nonetheless, metals consumption in the US will bottom eventually, and thus stop dragging on still robust Chinese metals demand. Moreover, risk of supply disruption continues to hang over the markets.

We are closing several recommended trades

As we have closed our long oil trade in our companion Energy Weekly, we are also closing our long corn and soybeans trades. Consistent with our revised metals outlook, we are also closing our long copper call, though we maintain our zinc-lead spread trade as we expect an eventual end to demand rationing for lead to result in a sharp price reversal. Finally, we are taking profit on our long gold trade recommendation.
Source: Goldman Sachs Commodities Research
October 30, 2007


Back from London and Moscow last week. In summary I would say that many investment bankers are cautiously optimistic not withstanding problems at Merrill Lynch and Citigroup for example. They are certainly more sanguine about credit events than I am. Or I should say they believe the linkage between credit markets and the real economy to be weaker than I do.

But we all agree the wheels may remain on the wagon until latest 3-months after the summer Olympics in Beijing next August. So in other words another year from today. That is a long time to remain a contrarian! Favored strategies are all commodity and energy linked or US dollar bearish as well as favoring some emerging markets. I do get nervous when everyone is on the same side of the trade? On the other hand, so long as I get my bonus! ; - )

UPDATE:
Video on Climate Change Argument

This is the kind of straight forward analysis that I admire! The cost versus the risks of not doing something against the cost versus the risk of doing something. That is how we need to frame debates and not who is right or who is wrong. Please pass it along. Thanks.
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Re: Trader's Corner 2007

Unread postby idomar » Wed 31 Oct 2007, 09:57:37

Thanks Mr Bill, I am somewhat knowledgeable on financial matters, but that has cleared up a few niggling thoughts in my head.

Also the climate change video, brilliant!

Should be seen by everyone on this forum and sent to all of their contacts.

I agree, the analysis is pretty bulletproof, and there is no scientific mumbo-jumbo just a do you want to be f*cked or not question.
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Re: Trader's Corner 2007

Unread postby MrBill » Wed 31 Oct 2007, 11:17:52

$this->bbcode_second_pass_quote('idomar', 'T')hanks Mr Bill, I am somewhat knowledgeable on financial matters, but that has cleared up a few niggling thoughts in my head.

Also the climate change video, brilliant!

Should be seen by everyone on this forum and sent to all of their contacts.

I agree, the analysis is pretty bulletproof, and there is no scientific mumbo-jumbo just a do you want to be f*cked or not question.


Well, as is usually the case, I thought about it later and then remembered that I forgot to say the only way someone can be long is for someone to be short futures or options (as opposed to finding oil in your backyard), so the positions always offset one another. Therefore, you can also say that in order to take profit on a winning long position you have to sell it, which temporarily is negative until it is absorbed by the market and then new supply or demand emerges that changes price expectations. And so it goes.

Here was something else I enjoyed reading today. Just some fundamental investing stuff, but good to keep in mind. Thanks.

$this->bbcode_second_pass_quote('', ' ') Theoretically, the opportunity to be a more productive investor is unlimited. In addition to adding asset classes, there's the potential to trade securities within those asset classes, along with a myriad of factor exposures to embrace, such as exploiting the so-called small-cap effect by going long a small-cap index and shorting a large-cap index.

But the physics of investing invariably steps in to spoil the fun. Increasing one's investment breadth inevitably leads to rising pressures on skill. Indeed, the broader your investment horizons, the greater the need for skill to manage the expanding roster of assets and strategies. You may be an authority on stock picking, but how do you fare in choosing bonds? Or currencies? Or commodities? And while the demands on skill can be muted by sticking to asset classes, the issues of rebalancing and asset allocation become more taxing on an intellectual level as the assets under management rise and the embrace of asset classes broaden. Short of a brain transplant, the only way to materially improve skill (assuming a sophisticated investor) is to tap additional resources, i.e., hire an advisor or build your own research team.

In short, there's no free lunch.

Source: THE TROUBLE WITH SUCCESS

Or the old re-investment risk dilemma! ; - )

UPDATE: from the Twilight Zone

It's unbelievable in a Kafkesque kind of way. It is Halloween, the US comes to work in a few minutes, we are expecting news on the Fed rate cut today and both the ICE and LME are down! Spooky!
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