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Posts Tagged ‘market volatility’

2 Jul 26 2010 @ 10:50am by Matt Smith in Capital Markets, Crude Oil, Economy

CNBC Squawk Box Appearance 7/26/10

Click on the below pic to launch to my appearance on CNBC’s Squawk Box this morning:

2 May 20 2010 @ 10:35am by Matt Smith in Economy, energy consulting, Global Energy, risk management, Risk Strategy

Commodityspeak Through the Medium of Shakespeare.

To tie in with the shindig that is the launch party of our UK office at Shakespeare’s Globe Theatre on June 15th, I present to thee forthwith ten quotes Billy the Bard would say if he were involved in commodity risk management:

1) There is nothing either good or bad; but thinking makes it so – yes, markets are driven by various forces passing the parcel, from fundamentals to technical analysis to outside influences. But sentiment, opinion and fear/greed also play a starring role. So even if something is not in bad shape, if the consensus makes it so, then prices will reflect this.

2) Measure for Measure – a measured approach to mitigating risk is the way forward, and ties directly to my haiku on risk management: uncertainty is…..an ever-present threat so….hedge hedge hedge hedge hedge.

3) Chaos is come again – Othello knew where it was at…crude down 23% in 13 unlucky trading days, from top of the pops (high of the year $87.15 on May 3rd) to the drop of all drops ($66.91 today – May 20th).

4) Better three hours too soon than a minute too late – hedging is not about picking the bottom of the market, it is about mitigating risk.

5) Though this be madness, yet there is method in’t – why it makes sense to quantify risk in commodity markets. Although no-one can perfectly predict the future, by equipping yourself with a Batman-like utility belt of tools for assessing the potential evolution and volatility of a market – from macroeconomic or econometric models to Value-at-Risk to technical analysis – you can establish parameters to quantify present and future risk and reward.

6) Foregone conclusion – Pah! Shazbat! Unlike in Othello, there is no foregone conclusion in commodity markets. Which is probably a good thing too, as there would be no need for an energy consultant (= Unhooray!).

7) Screw your courage to the sticking-place, and we’ll not fail – having the knowledge to stand by your convictions on market opinions is key. And then develop, evolve, and expand on this opinion by using research, analysis, facts, and cement.

8) The winter of our discontent – no thank you, we have already been through this – no need for a sequel.

9) When shall we three meet again? – the witches from Macbeth are always good for a quote, even without mentioning hubbling and bubbling, toil and troubling. There’s many clichés to describe this – a rising tide lifts all boats, in times of crises all markets correlate, etc, etc, – the point is, following commodities is about monitoring all assets – be it equities, bonds or currencies, as they all influence each other, and can provide insight into the short-term movement in another.

10) By the pricking of my thumb, something wicked this way comes – two words for you – hurricane season. This year is predicted to be one of the most active seasons for years based on some key factors. That said, some say a trained chimp can predict hurricanes better than NOAA.

If you wish to attend the UK event, please click on the ‘Much Ado..’ picture at the top of the post.

I bid thee farewell.

1 Mar 31 2010 @ 10:50am by Matt Smith in Capital Markets, Crude Oil, Economy, Natural Gas

Revisiting Old Friends.

As we reach the end of an eventful first quarter, it seems an appropriate time to reflect and review some of the charts we have looked at on our journey through energy burritoville since its inception last fall. So let’s jump straight to exhibit one. We looked at the oil/gas ratio back in mid-December, when crude was at $73, natty at $5.50. This put the ratio at around 13, while the near-term mean (= 200-day moving average) was above 15. We highlighted at the time that the ratio should rise, as natural gas was at an eleven-month high, while crude was at a two-month low:

Oil/Gas ratio - 12/16/09

Fast forward three-and-a-half months, and the ratio continues to elude its near-term mean, but this time to the other extreme. As the natural gas prompt month is at a six-month low (<$4), crude is testing near-three-month highs ($83). The ratio has blown out to the upside, and is now above 21 (versus the 200-day moving average of 16). The ratio may narrow over the coming quarter, as crude lets some pressure out of its tires, while natural gas could find some near-term support after a post-winter drubbing (or at least see limited downside):  

Oil/Gas ratio - 3/30/10

The second old buddy is the VIX. Again back in mid-December, we took a look at the VIX index – which was at a depressed level (the VIX measures volatility on options on the S&P500 equity index), indicating a low level of worry for a downside move in equities. What has happened in the last quarter or so? The S&P500 has moved from a fourteen-month high to an eighteen-month high. Risk-taking has continued, while fear has faded like a pair of old Levis. In summary, much of the same. But just like a stopped clock tells the right time twice a day, I still call for a significant correction in equity markets, which will in turn cause volatility to spike once more. These two shall cross swords:

Last, but by no means least, our final familiar friend is the underemployment rate. This measures 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 stopped looking. When we took a look at this rate last fall, it was at 17.8%, while unemployment was at 9.8%. Currently the underemployment rate has retreated to 16.8%, while unemployment is now back to 9.7%. Friday sees the March nonfarm payrolls released, which should show the first significant increase in jobs in well over two years. That said, this number (and the coming months) will be distorted by temporary Census workers, while February’s inclement weather (which dampened labor growth) will probably skew March’s number higher. The main takeaway here is that although the next few months may paint an improving employment picture, do not be lulled into into a false sense of security; we are not out of the woods yet:   

1 Mar 5 2010 @ 10:50am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, Random, UK natural gas

Burrito Bites

Welcome to Nonfarm Friday, my favorite day of the trading month, as it brings a more volatile reaction than eating mentos and drinking soda. Here’s a random list of events that have defined my deliberations on markets this week:

  1. There was a spanner in the works of the engine room of the global recovery, as Chinese Manufacturing took a nosedive (please feel free to complete the expletive “oh —-“).
  2. To temper this news a little, India came through with impressive manufacturing growth, and is expecting economic growth to ratchet up.  
  3. US natural gas has hit a three-month low as negative sentiment is encouraged by falling  weather-driven demand as we enter shoulder months.
  4. Greece had a bond auction and it wasn’t a catastrophe, mostly due to reassurances made the previous day about how they were to narrow their deficit gap(ing hole). Greece lives to fight another day, while tragic flaws remain.
  5. Crude broke back above $80, mostly due to currency fluctuations and risk appetite, and less to do with market-specific fundamentals (per the trend of recent times). The 4 mb build in weekly inventories was not bullish, but also not unusual.
  6. UK natural gas hit a new low for the year, with a similar story of funky fundamentals to US natty (=improving weather outlook, lower demand).
  7. US unemployment data came in better than expected (-38k jobs vs. -68k expected). The number was teed up to provoke a likely positive response…if  it had been poor, it would have been blamed on recent inclement weather, but as it was good it was viewed as robust. Hum dee dum.  

 

One good list deserves another, so let’s move straight on to the burrito bite buffet:

–Green tip of the week – save electricity on those middle of the night excursions by buying glow in the dark toilet paper.

–10 companies reinventing energy infrastructure.

–If anyone is able to chip in the additional $1,999,230, I’d love to combine our savings and  buy a Greek island. It’s for a good cause too.

Natural gas wins hands down in the fight against global warming.  

–This is random but fascinating – insuring Nicole Kidman. Also the first comment below the article about Jackie Chan is great.

–We hear about peak oil, but what about peak natural gas?.

–Prohibiting insider trading in commodities – The Eddie Murphy rule  (proceed to next bite if you have never seen the film Trading Places).

–A monster of an article, but fascinating – Michael Burry, the man who led the way in shorting subprime.

–Looking to own the latest in popular pets? – go get a goat.

The Burrito Deluxe Award of the week goes to equity markets. After a tentative start to the week, they are finishing with a flourish, having survived a torrential downpour of data in this first week of the month – avoiding potential pitfalls, potholes and puddles.

The Burnt Burrito Award of the week goes to stuttering Chinese data, from tumbling manufacturing numbers to stumbling forecasts of refinery slowdowns.

0 Feb 4 2010 @ 10:24am by Matt Smith in Capital Markets, Crude Oil, Economy, Natural Gas, Random

A Weapon called the Word

roger-federer again

I find it amazing that at a time when information has never been more accessible, and there has never been so much data to digest, that focus falls on the scrappiest of morsels to move markets.

For example, everyone waits with bated breath to compare and contrast the latest statement from the US Federal Reserve after their meetings, with markets hinged on the subtlest of changes to their rhetoric. Markets have rallied like Roger Federer or sank like the Titanic on single words; just this past Wednesday we saw equities and commodities rally as the statement changed from ‘economic activity is likely to remain weak’ to ‘economic recovery is likely to be moderate’ – a blunderbus of betterment by Fed standards.

As an aside, Ben Bernanke  (banana Ben, helicopter Ben, Widow Twankey, choose your weapon – I prefer to call him Sir) learnt the power of his words the hard way. In the first few months of Mr Bernanke’s tenure as Fed Chairman he spoke candidly to Maria Bartiromo (= rather pleasant CNBC pundit) at a Washington dinner.  His remarks were subsequently reported a few days later, and stock prices plunged.  Mr Bernanke learned a hard but important lesson. 

lexluthor

If the Fed’s power seems somewhat unwieldy, it is equally matched by the preposterousness (or prowess, delete as appropriate) of Opec. Like Britney Spears, Roger Federer (that man again) or Lex Luthor, just when you think Opec has lost their power and influence…poom!…they come back with a vengeance. You can gauge when an Opec meeting is on its way, as commentary starts from the various cartel comrades. Which would be fine if a) they all sang off the same Opec hymn sheet or b) if their comments didn’t move markets. But herein lies the problem. The greater the need for Opec to placate the market, the seemingly greater their efforts to be less cohesive and more misleading, as their esoteric interests pull them in different directions.

Back at the chopping block of our burrito, we know natural gas can be moved by certain analysts expressing their market opinion (or even just a soundbite) to the newswires. Unable to access the underlying research to understand their logic, we are left to extract what we can from their quotes (or – more accurately – the journalist’s intepretation of such).

britney-spears

The phenomenon of markets latching on to certain scraps and discarding others, can be explained away to a certain extent. If market sentiment is bullish prior to new information, then investors cannot help but look for the bullish angle to validate their point of view, and vice versa. If data releases are a surprise to consensus, then prices can whipsaw in the opposite direction. Or sometimes we simply see the Kansas City Shuffle.

What all this leads to explain is that markets are unpredictable. But that still doesn’t justify why they focus on certain news flows. It does highlight, however, that a few choice words from a certain sphere of influence (i.e. the Fed, Opec, an analyst, etc) can have much more force than a fact. What got me off on this tangent in the first place was the Nigerian militant group, MEND, who last weekend announced an indefinite end to their ceasefire. And this was the ironic thing: in the past their greatest impact has come from brute force and violence to prove their presence. Admittedly, while they still undertake certain acts of sabotage, they have come to realize that one of  the other advantages they have is a different weapon – a weapon called the word.