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Posts Tagged ‘bonds’

0 Jan 24 2013 @ 10:55am by Matt Smith in Capital Markets, Economy, Global Energy, Random, risk management, Risk Strategy

Everything But Energy

Sometimes it is useful to take a look at the bigger picture, or a completely different picture, when trying to assess the vibe (man) of a certain market (i.e., energy), especially given some of the negative vibes swirling in the markets at the moment. As regular burrito readers know, the foundation of this blog is built on the belief that financial markets influence and are influenced by each other. Therefore, by taking a look at current trends in equities, commodities, bonds, economic data, and currencies – basically everything but energy – it can help us get a more rounded view on the subject that is most dear to us. » read more

0 Aug 18 2010 @ 10:55am by Matt Smith in Crude Oil, Economy, Global Energy, Natural Gas

The Good, the Bad and the Ugly…..and the Odd

Alrightee folks, this week we are going to look at four charts which highlight the good, the bad, and the ugly currently surrounding our dearly beloved commodities, and general markets. And one chart which highlights the oddness.       

So let’s dive straight in and start with the Good. The good in this instance represents strong production in the US natural gas market. As the chart below illustrates, production has never been this good, for this year or for the past five years. Despite prices being at what is considered a low level, production continues to grow as break-even costs for new unconventional plays (i.e., shale) mean it is cost-effective to drill for gas at sub-$5. This is further reaffirmed by natural gas rig counts currently hitting an eighteen-month high

US weekly natural gas production (source: Bentek)

‘You see, in this world there’s two kinds of people, my friend: Those with loaded guns and those who dig. You dig.’   

The Bad is illustrated through current distillate demand in the US. As the arrow clearly indicates, demand has headed south at a rapid clip since the highs made for the year back in June. This wouldn’t be such a worry in itself; after all, distillate demand is seasonal, and it is currently the time of year for demand to be in slumber. However,  the bigger issue is that demand levels are only a meager 3.6% higher than last year’s anemic levels, and well below the 5-yr average. Not the data you would expect from an economy supposedly in the early throes of expansion:     

US distillate products supplied (source: EIA)

‘There are two kinds of people in the world, my friend: Those with a rope around the neck, and the people who have the job of doing the cutting.   

The next chart is U-G-L-Y (and no, it doesn’t have an alibi). This chart shows the yield on 10-year US government debt. Prices of bonds move inversely to yield (e.g., as prices rise, yields decline). Government bonds, especially Treasuries issued by the US federal government, are seen as the safest of assets; in times of heightened risk aversion (= ‘flight to safety’) investors move their money into bonds, pushing prices up (and yields lower). The last time the yield was as low as 2.6% was back in March 2009, which coincided with equity markets hitting their lows. Government bonds in the last three months, however, have seen strong buying once more. This signals another flight to safety as investors’ views on the economic outlook have deteriorated (with rising concerns over a ‘double dip’ recession) and worries of a deflationary environment shimmy from being incredulous to in-the-mix:  ‘There are two kinds of spurs, my friend. Those that come in by the door; those that come in by the window.’   

And finally, I found this interesting as it was Odd. Back in June we looked at the revaluation of the Yuan (through Sonny and Cher…c’mon, you remember!). At the time, the de-pegging of the Chinese currency was met with both excitement and the expectation for a strong rally. However, the last two months have yielded a modest move (don’t let the chart deceive you…the move from 6.83 to 6.79 only looks big relative to the lack of movement in the previous year). For now it looks as though the revaluation has allowed the Chinese to both appease foreign nations who were accusing them of currency manipulation, while also not drastically changing the currency landscape for its exporters; a win-win situation. 

It feels fitting to end with some type of poignant quote. But instead I leave you with two straight-shooting quotes from Mr Clint Eastwood himself. The first ties in nicely with risk management, reminding us that life is unpredictable: ‘if you want a guarantee, buy a toaster’. And the second is to keep a positive perspective: ‘I don’t believe in pessimism. If something doesn’t come up the way you want, forge ahead. If you think it is going to rain, it will’. That’s my lot; thanks for playing.

2 Mar 4 2010 @ 9:04am by Matt Smith in Capital Markets, Crude Oil, Economy, energy consulting, risk management, Risk Strategy

Equities and Bonds = Pinky and the Brain

Last week I was up in arms about inflation (or its lack thereof), and how it could affect our dearly beloved commodities. This week (is no different from any other week in that) I’m trying to get my head around what’s happening in general markets, and am currently pondering equities and bonds. 

My interest is piqued by the aforementioned two tinkers, because if I can figure them out, I can color my paint-by-numbers portrait of the economic landscape, and join the dots on my canvas of commodities. There is method in my madness: equities have recently been a shepherd to commodities, specifically crude oil (for the last year, everywhere that equities went, crude was sure to go). As for the bond market, it is a barometer of both risk appetite and inflation expectations – both key influences on commodities.   

So here’s the scoop; while equities are looking like they are topping out (=risk aversion rising), I look to the bond market (and specifically Government debt) – which historically has an inverse relationship with equities (equities = risky, bonds = safe) – to give some indication for future growth and inflation. So hence in this current environment, equities and bonds = Pinky and the Brain.  

The Brain: Are you pondering what I’m pondering?
Pinky: I think so Brain, but burlap chafes me so.
    

The bond market - more intimidating than Mr T.

‘So what’s the big deal about the bond market?’ I hear you ask. (I will now try to avoid being super-dull and muzzle the market-nerd in me). Essentially the bond market is considered to be the wisest of all asset classes. The Brain, if you will. One of the most famous quotes about the bond market was made by James Carville, who famously quipped “I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everyone.” This is because the bond market tends to be the voice of reason when other asset classes are losing their heads. For example, the change in 2-yr Treasury yields is a good way to gauge economic sentiment; they will rise as optimism grows (because expectations increase for a higher interest rate), or vice versa. As for 10-yr Treasury yields, they provide an indicative view on longer-term inflationary expectations. There are many factors that go into the bond market – too many to put onto the chopping board right now (quantitive easing and gaping budget gaps are current quandaries…while bond guru Bill Gross highlights further problems here) but my main take-away is that the bond market is a tool to assess the outlook for near-term growth and inflationary pressures, which we can then apply to our outlook on commodities.       

The Brain: Pinky, are you pondering what I’m pondering?
Pinky: I think so, Brain, but if they called them “sad meals” no one would buy them.
  

I have faith in the bond market. Like the Brain, it is deadpan, composed and smart. As for equities, all I have to say is P to the I, to the N-K-Y. They are scatter-brained, emotional, and seem to enjoy being hit over the head. And as life imitates art, the bond market is always teaching equities a lesson, time and time again.    

The Brain: Pinky, are you pondering what I’m pondering?
Pinky: I think so, Brain, but how will we get the Spice Girls into the paella?
 

So to draw this tail (I tried to resist) to an end, both of our heroic characters in today’s story could be bearish influences over the coming months. Equities could potentially scurry lower, while bonds yields are resisting the apparent urge to scamper higher (=prices lower) as deflationary or double-dip fears could develop. With these potential headwinds, commodities are likely to find it increasingly tough to take over the world, tonight, or any time soon.