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Posts Tagged ‘market cycles’

0 Mar 8 2012 @ 10:42am by Matt Smith in Crude Oil, Economy, Global Energy, risk management, Risk Strategy

A Bicycle Built For Two

I must apologize as I feel like I’m jipping Burrito readers again. I usually try to provide an even mix of serious posts with the lighthearted (i.e., a quirky theme or an interesting list). However, this week I have failed in my latest foray into pop culture, and it has left us to take a sudden detour…on a bicycle built for two.  

And here’s some more honesty. I have a confession to make: I avidly collect charts. I have this nerdy tendency to snag a chart – be it on a Tuesday afternoon or early on a Saturday morning (as my kiddos watch Megamind for the 57th time). Then I store it like a butterfly in a jam jar, to occasionally revisit from time to time. So although distracted by other themes, I have been able to revert to a few charts from my collection which illustrate how crude oil prices continue to move….in tandem.

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2 Mar 18 2010 @ 6:33am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, risk management, Risk Strategy

A recipe for disaster, or ingredients for success?

I really like the quote that says ‘an optimist invented the plane, whereas a pessimist invented the parachute’. I am not declaring myself in either of these camps (I am obviously a well-balanced realist), but believe it would be misguided not to consider the upside and downside risks to current commodity pricing. Admittedly, some of these issues apply more to some commodities than others, but essentially, the sentiment is an ever present theme. So, let’s kick off with looking at some of the ingredients that could derail markets:     

  1. Economic data turning for the worse, led by housing, manufacturing and employment
  2. A deflationary economic environment
  3. A falling equity market
  4. Excess supply
  5. Emerging markets successfully cooling their economies 

ECRI Weekly Leading Index

Let’s tackle each one of these individually (yet briefly too). First up, economic data turning for the worse. The chart (left) illustrates the ECRI weekly leading index, which takes the temperature of the US economy on a regular and timely basis (ie, erm, weekly). This index bottomed out at the start of the recession (which makes sense as it it is a leading index = forward-looking), and has moved higher at a fair clip ever since. That is, until the last 12 weeks, when it has turned decisively lower. This index is an aggregation of a number of data points, hence its weakness raises a rather large red flag. Next up, a deflationary environment. We are already seeing signs of deflation creeping into markets, be it through wages or rent, or through pricing pressure on everyday goods due to new-found frugality in consumers. And a falling equity market would likely occur through the simple equation of the above bullets: 1 + 2 = 3. As for commodity-specific data, serious risks of surplus supply exist across commodity markets; for US natural gas it is from shale plays and increasing rig counts, for crude oil it is from quota non-compliance by Opec, for UK natural gas it is from LNG; and the beat goes on. Then the final bullet: emerging market risk. This one is a toughie. Too much growth could power commodities to such a high price that they crimp potential growth in lagging developed markets. On the other hand, if governments in these emerging markets (especially India and China) go overboard in efforts to quell excessive liquidity and credit in their economies, they risk putting the brakes on growth, which would surely upset global markets. 

That was all a bit hectic. Let’s have a brief interlude of humor before we truck on with the flipside of the coin:

Alrightee. Now to the path that could lead prices higher. In all fairness, it is pretty much the polar opposite of the pessimistic points:      

  1. Improving economic data  – especially industrial production / manufacturing
  2. An inflationary environment
  3. Continuing strength in equities
  4. Continuing demand growth for goods / commodities
  5. Continuing emerging market strength
Bloomberg Financial Conditions Index (Mar 07 – Mar 10)

For the prosecution of falling prices, I would like to present exhibit number one – a chart which illustrates an improving environment in financial markets – aptly named the Bloomberg Index of Financial Conditions. This shows that financial conditions have continued to improve at a trampolining rate since the financial meltdown-panic heydays of late 2008, an indication that the market is continuing to normalize after the shocks of recent years. Essentially, we have clambered over the wall of worry and beyond the territory of financial woes.    

As you well know from my rants, markets are all interlinked, hence bullets 1,3, 4 and 5 go essentially hand-in-hand here. Improving economic data (1) will undoubtedly be driven by higher demand for goods (4), boosting equities (3), while continuing emerging market strength (5) from domestic growth will too spur on global investor sentiment (back to 3, then 4, then 1). It is as inevitable as wrinkles and gray hair that inflation will once again rise up, although when this will arrive it is impossible to say. But one thing is for sure, a commodity rally will be a natural by-product of both an inflationary environment or an improving economic environment. It is on the horizon. 

I don’t know what’s going to happen. I can make a guess, but that is all it would be – a guess. It is much more important to to keep an open mind, but also be aware of all eventualities. So I sign off as I began; with a good quote – ‘the pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails’. I believe we are poised between the devil and the deep blue sea, and all we can do is hang in there, and sail broad reach. Ahoy.

3 Jan 13 2010 @ 10:55am by Matt Smith in Capital Markets, Risk Strategy

The Kansas City Shuffle

lucky#slevinI don’t watch much tv, but when I get time, I love watching a good movie. Something I watched recently (for the third time) is Lucky Number Slevin. This film is great for a number of reasons – the cinematography, Morgan Freeman, Ben Kingsley, just watch it – but the best part is a scene with Bruce Willis, where he does what is known as the ‘Kansas City Shuffle’. As many good things tend to, the Kansas City Shuffle traces back to jazz – deriving from a song which states:

‘It’s a blindfold kick back type of a game
Called the Kansas City Shuffle
Whereas you look left and they fall right
Into the Kansas City Shuffle
It’s a they-think you-think you don’t know 
Type of Kansas City Hustle’

I know what you’re thinking;- uh oh, Burrito boy – here you go again, off on a tangent. But here’s the wrap – the key and the kicker to the Kansas City Shuffle  is one of the pillars of financial markets: sentiment and contrarian logic. If everyone is expecting a move in one direction, the exact opposite tends to happen.

This is why I think sentiment is so compelling. If everyone is bullish about a certain asset – be it gold, oil or toilet paper – it is a good time to sell it, as there is no-one left to buy. And on the flipside, if everybody hates a certain asset (like natural gas last year), surely it can only go up because all the haters (I really, really don’t mean to sound like a rapper) have already sold it? There are obviously going to be exceptions to this rule (most prominently, momentum trading), but for the most part, sentiment puts forward a credible case.

Sentiment levels are essential to watch because markets turn when they reach extreme levels (just as volatility highlights turning points). Contrarian investing is absolutely not just about going against the grain, swimming against the tide, or dissenting. It is about understanding when a trade is overcrowded, when pessimism or optimism in an asset is overdone, and when a break in trend is long overdue. 

Life is based on emotion, and markets are often driven by emotional responses rather than rational calculations. Emotion is not rational, so it is impossible to deny that markets are not oftentimes irrational; the bubble-and-bust history of financial markets is living proof of this. And that is why they are the coolest thing ever, as irrationality is impossible to predict. We can never truly win.

 

0 Jan 8 2010 @ 10:50am by Matt Smith in Crude Oil, Economy, Random

Burrito Bites

Happy Friday, one and all. Going forward,  I’m going to be posting a collection of the most interesting articles I have read over the previous week. Themes may emerge, such as my respect for David Rosenberg (similar to my admiration for Batman when I was seven), Barry Ritholtz (bringing punk rock attitude to financial markets), and my unending love affair with The Economist (I realized how sad that was as I wrote it), amongst many others.  Anyhow, I hope this cuts through the chaff and is of use:

—> This is pretty cool – it’s  five centuries of bubbles and bursts – a succinct summary of financial frenzies. The article has both pictures and is easy to understand –  key ingredients for this Burrito boy to digest. 

—> Jeff Rubin, former CIBC chief economist, has got my back –  he called $100 oil in 2007, and is calling for it in 2010.  

—> Here is my favorite article this week, by a country mile –  trainee hypnotist puts himself into a trance. Fantastic. 

—> The conundrum continues that while jobless claims are falling,  people claiming unemployment checks are at 20 million-plus people in 2009 and rising. 

—> Here’s Dave Rosenberg (aka Batman), outlining why this isn’t a new cyclical bull market, and here’s the full commentary

—> There’s more projections on this link than you can shake a stick at – basically a review of all the key analyst outlooks for 2010, with trade recommendations and potential outliers to boot.

Finally, the Burrito awards:

shiny happy person

Out of Time? Nah! REM Singer Michael Stipe.

The Burnt Burrito Award of the week goes to The Met Office – the official UK weather service, who projected a 50% chance of a milder-than-average winter last month.  Two hours and forty-three minutes after the statement was released, temperatures tumbled and the UK experienced the coldest December for 14 years. To add insult to injury, things have got progressively worse since, with an emergency balancing alert made on the UK natural gas market this week – which is basically a panic button requesting suppliers to increase supplies, and consumers to clamp down on usage.   

The Burrito Deluxe Award of the week goes to REM singer Michael Stipe, who reached 50 years old this week. Rock on!

1 Oct 13 2009 @ 1:00pm by Matt Smith in Capital Markets, Economy, Global Energy, Random

Things that make me go hmm

This one really gets my goat, does my noodle in, and twists my melons. And it goes by the name of  ‘the underemployment rate’. So, the story begins….the underemployment rate includes those people who are unemployed, those who are working in a part-time job (but wish they had a full-time job), and those who are so discouraged that they have (temporarily, hopefully) stopped looking. So it is basically the unemployment rate (a portly 9.8%) plus a few people here or there working part-time in a coffee shop and sort-of-looking for a proper job, plus those who just can’t be bothered at all. Right? Wrong.  underemployment

While the current unemployment rate is 9.8%, the underemployment rate is nearly double at 17%. This is reaching pandemic proportions, as baby boomers are forced to retire later as their pensions have just been halved, 18% of  18-24 year olds are unemployed, and 7,000 people a day are facing the expiration of their unemployment insurance. 

And that isn’t even the biggest doozie on deck: since the start of the recession in December 2007 we have seen 6.8 million people lose their jobs in the US – just shy of the population of Hong Kong.

The crux of the problem arises when we build our energy burrito; the ingredients just don’t add up. Energy demand is driven by consumption. Consumption is driven by spending.  And spending is driven by income – income earned in a job.  And consumer spending makes up approximately 70% of GDP in the US. With such a drag on GDP, how can we expect energy demand to not only recover (without such espresso shots as cash for clunkers and $8k first-time homebuyer rebates), but also spur itself on to significant growth?

Put simply, we can’t. And the punchline? Sorry, there isn’t one.