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Posts Tagged ‘risk management’

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.

1 Aug 12 2010 @ 8:46am by Matt Smith in energy consulting, Random, risk management, Risk Strategy

‘That’s not a motto, that’s just you saying a bunch of things.’

There’s a hilarious line in the film Role Models, where Paul Rudd turns to Seann William Scott and says, exasperated: ‘That’s not a motto, that’s just you saying a bunch of things’. Not only did this make me chuckle, but it struck a chord, as there are many mottos bantered around in financial markets which are, well, just a bunch of things and little else. So this week I thought I would seek inspiration from my work colleagues – my own role models, per se – to provide me with some words of wisdom. Some relate to energy, and some relate to life. But all we can relate to, so enjoy:

‘Without energy there is no capacity to do work.’
– This makes sense in a couple of ways, my learned colleague told me; not only is this the dictionary definition for energy, but without energy, there would be no Summit. He’s got a point (well, two in fact).

‘You may not believe everything that is said, but if you look hard enough, and take the emotion out of it, you might see some truth worth hearing.’
– This is a message we try to get across to clients; even if you don’t believe us, we are here to tell you the stark truths.

‘Change will come when the pain of staying the same is worse than the pain of change.”
– Again, at some point, clients realize it is wrong to fear change, especially when maintaining the status quo involves the pain of losing money.

‘You can’t always get what you want…but when you try sometimes, you get what you need.’
– This is something our CFO tells (sings?) to his kids, but it relates just as well to hedging strategies; you may not get what you want (= the lowest price), but you get what you need (= budget certainty).

‘You know what you get when you don’t get what you want…experience.’
– And the flip-side of not hedging; if the market turns against you, you gain the experience of why hedging makes sense.

Five further mottos for life:
–‘Never mistake activity for achievement.’
–‘Never celebrate mediocrity.’
–‘No one said life is easy.’
–‘You get what you get and you don’t throw a fit.’
–‘I will not idly tiptoe through life only to arrive safely at death’s doorstep.’

Thanks so much to this week’s role models…Ann Barzak, Deena Burnett, Evan Cox, George Willett, Joe Higgins, Joyce Gee, Michelle Kerbow, Phil Wafford, Roger Durham, Tom Muddell.

I leave you with two mottos from our CEO, Steve Wilhite (it’s great he humors my occasional whims…), one for work and one for life:

‘Most people fail to plan, not plan to fail…but failing to plan is like planning to fail.’

‘Work then play, work then play, work then play – if you do that, the work is better and so is the play.’

1 May 27 2010 @ 9:07am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, risk management

Doorbells and Sleigh Bells and Schnitzel with Noodles

Here are a few of my favorite things. I’m going to go a little left field of nerdy on you here, so I apologize in advance. Here are three pictures that paint three thousand words, which help me keep a grasp on what is going on. Actually, they are just three cool things. So here we go, first up, everything:

I know I always bang the drum about this, but it is essential to keep a handle on what is going on across asset classes, as they can help you to understand short-term movements in your own asset, whatever that may be. Above (courtesy of Econompic) is the performance of a smorgasbord of assets for the month to date (through the medium of ETFs). This illustrates how the best performing asset has been Treasuries (= US government debt = flight to safety), while the worst performer has been our poor old buddy, Texas tea. 

Next up is one of my favorite indicators. And I don’t love this indicator for its accuracy (it has an awful track record of revisions), I just love the pure havoc that it wreaks on the first Friday of every month.  So without further introduction, I present to you Nonfarm Payrolls: 

Don’t get me wrong, US unemployment data is an essential barometer of the economy (…but just viewed over a longer time-frame); it’s the hubris and brouhaha it causes that I love. As for the actual data, the chart above shows how in 2008 and 2009 we saw 8.4 million jobs lost (that’s all the down bars on the right-hand side). Although we are seeing improvement across much of the economic landscape, we need to see sustained and improving job creation (extending from the circled area) to spur on consumer spending to spur on a housing recovery to spur on a sustainable recovery.

Finally, if I was stranded on a desert island and could only access one datapoint which to gauge the US economy by, it would be this (I make that comment knowing full well if I were stranded on a desert island I would be much more interested in hunting for coconuts); the Conference Board Coincident / Lagging Ratio, which measures the strength of the business cycle:

A rising Coincident/Lagging ratio (= indicates improvement as current conditions beat yesterday’s) is an historically proven positive indicator. However, should this indicator wobble and turn lower (…it’s awobbling), that would be bearish indeed.

That’s all folks; thanks for viewing my favorite things – feel free to take them with you as you leave…and remember, they will help if a dog bites or if a bee stings. (err, maybe..).

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.

0 Apr 21 2010 @ 10:55am by Matt Smith in Natural Gas, risk management

US natural gas through the medium of the Hoff

So it hit me like a thunderbolt. It was after a recent bout of analysis that I came to the staggering realization that US natural gas has many similar attributes to the career of the man, the myth, the legend that is David Hasselhoff (‘the Hoff’). Through the years we have laughed, cried, and scratched our heads at the Hoff, a set of emotions not dissimilar from the ones evoked by the US natural gas market. So forthwith, I present my steadfast case.

First up to the stand, Knight Rider. After the blow-up by natural gas in the last year and a half, the face of the gas market has been drastically changed – much like Michael Knight’s. With new supply from forces such as LNG and shale coming to the fore, natty is left to battle against potential oversupply, while hoping industrial demand will continue to gather pace. Much like our quaffed hero, natural gas is not necessarily battling against other adversaries (although coal switching is a current consideration): changing dynamics make it it’s own worst enemy, like Michael’s nemesis Garthe Knight. And the kicker to all this – Michael is a man close to my heart, leaning on technical analysis (of a different kind) through his car and sidekick KITT (Knight Industries Two Thousand….I never realized…Wikipedia wins again…). 

Prior to the aforementioned blow up (-> -> $2.40), natural gas had been living to excess, partying like a rock star, and running up to $13.70. This parallels with another point in the Hoffmeister’s life. But as improving economic data attest, a return to form for natural gas may see it back under the spotlight and very much in demand again (regardless of T Boone and his natural gas wacky races). And like our dearly beloved commodity, the Hoff is also ready to rock on once again (in the night, presumably). 

The third and final serendipitous era of Mr H which ties to the good ship natural gas, is his period as lifeguard Mitch Buchannon. Life for natty, just as for Mitch, is never plain sailing, with storms (literally) seemingly always on the horizon. And just as hurricane season appears on our radars,  we have to recognize that this is a natural part of our commodity’s yearly life cycle, and is as much a mainstay as Mitch was to Baywatch. All we can do is manage our risk against these possible eventualities, as situations can turn fast. (and we can’t all move in slow motion…along a beach…with a flotation device…).

So where does this all leave natural gas? Basically, in a similar position to the Hoff. It has been down and out, but is gritting its teeth and is ready to show us what it is made of. Just like you can’t keep a good man down, natty is ready for a scrap. But it can be safe in the fact there will always demand for such a unique commodity. It’s been emotional.