Thursday, November 27, 2014

11/27/14 Crude Collapses

OPEC leaves output unchanged, and oil traders respond by selling.  Last quote was under 70, or -7%.  I'm expecting the energy sector to sell off hard on Friday, and bracing for -7-10% (maybe worse) moves in my positions.  It's not the news, but the reaction to the news that matters.  Position sizing will hopefully limit the damage to about -1.5% of the portfolio, but I sense that the direction of maximum pain will be a brutal gap down- and there's no telling what may unfold when traders panic.

The collapse in crude is 'a big deal.'  I believe it signals the beginning of a secular decline in oil prices.  The question is whether it portends something more ominous.  A decline in oil prices has marked the beginning of recessions, a 'tell' in the form of weaker global demand and deflation.

The currency markets are moving, with large percentage declines (against the $USD) in the Euro, the Pound, and the Australian and Canadian dollars.  Spot silver is off -2%, spot gold -0.73%.  The Toronto Exchange closed down -0.77%.  Australia's All Ordinaries has opened off -1.2%.  US futures are not affected (the DJIA currently +3), as lower oil prices are expected to benefit the US economy.

Market movements are a dance.  Let's find out how Asian and European markets react to oil prices.

59 comments:

  1. Anyone know which companies represent the 'fracking' sector?

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  2. $US has to make it past 88.71 the 92.33 is the next resistance.

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  3. 2nd yes emes hclp slca

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  4. 2nd - I mentioned this a couple months ago but take a look at the long term chart of oil. It is a cyclical commodity and we went thru a massive blowoff top in 08. These cycles in the past weren't that correlated at all with recessions in fact if anything spikes were more correlated with recessions. I've had the mindset to avoid any intermediate to long term trades in the entire space. Think about the mindset of the avg person. It was generally accepted that higher oil prices were inevitable and that the shale boom would supply us with an endless supply of domestic energy sources. Those were big bubbles. I'm glad it's popping. In the bigger picture so much has been thrown at stocks since 99 yet now we have a lot of tailwinds, one of the biggest being continued skepticism

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  5. TEP - Seems logical capital could flow into this one.

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  6. In my view, US energy production has been helping to lift the $US, so lower oil prices threaten this dynamic.

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  7. The energy sector has been a strong source of the economic activity and a provider of high paying domestic jobs. Ideally, the savings from lower oil prices will be spent in other areas like consumer discretionary, but the risk is that it is just saved, or spent on goods from other countries that do not improve the employment situation. The reality is, we need more good paying jobs to keep the economy moving forward.

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    1. Trading in a foreign market question: Say for instance you realized gains in the US market and for instance on those capital gains, you pay a tax no doubt but if those gains are in the US market does the Canadian government benefit from the capital gains tax, or do they pass it to the government presiding over the market where the gains were realized?

      I don't understand this mechanism but if the gains go to your country of residence then that would be true of other countries as well, such as Singapore or Brazil, for instance.

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  8. Shanghai Stock Exchange up 8% this week. Guess that opening of the market made a difference

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  9. BXE - $4.11 - Back to where I loaded and then flipped shares previously.

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  10. So who benefits the most from these lowest oil prices, Asian energy importing economies such as Singapore and Japan, perhaps?

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  11. YPF - Just when I was becoming concerned this one is immune to lower oil prices, it finally moves in sympathy.

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  12. OAS - Now there's a price leader!
    OOIL - This company makes some sort of water filtration system for the fracking industry but it's not clear if it removes radioactive sedimentation.
    PLL - Perhaps these guys are not only cleaning up sewer water so Los Angeles can flush their toilets ut also have a hand in cleaning up frack water?

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  13. SRCL - Here's one that also makes water purification systems. I hear Municipalities have an obligation for providing clean water and reducing pollution effluent discharge into waterways.

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    1. Just seems logical that if we're going to replace fossil fuels with solar panels and by rubbing sticks together then we'd also be discussing water treatment.

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  14. INTC - Will be a double soon enough.

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  15. Mining - Isn't energy a large factor in mining costs? Well, I guess not just any energy but electricity specifically.

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    1. Oil is also a big cost with the heavy equipment they run.

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  16. CP,

    We only pay capital gains tax in Canada and nothing to other countries. I'm pretty sure this is standard around the world.

    For dividend and other income, Canada has tax treaties with the US and most other countries. Generally there is witholding tax of 15% to 25% (US is 15%, UK is 0%), but this is waived if the dividend is received within a registered retirement account for the US and a few other countries.

    The other thing is we have a single capital gains tax at 50% of the regular rate and none of this short-term, long-term holding requirements I think you have, so much better for short term trading.

    If you want more info google "USA Canada Tax Treaty Investments" and you can get the full details

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    1. Interesting, so capital gain tax revenues on US equities go to the foreign government the investor resides in. Thus if Carlos Slim (and his minions) for instance had huge capital gains from US investments the capital gains tax revenue would go to the Mexican government.

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    2. Our rate is higher for ST trading than LT trading.

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  17. Interesting, last time they slammed oil equities XOM recovered first intraday and then kind of led. Today XOM is again show greatest relative strength. And it filled a gap.

    Thin holiday trading never helps. My PXD getting slammed, knew it was high risk, passed previous low like nothing. GDP another, treacherous.

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  18. Shale plays...BAS/RES/NES/CRR...take a look if you dare.

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  19. SD/TLM/HK biggest lossers I can find.

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    1. GDP/OAS are pretty big. BACML says OAS and CLR can grow cash flow at low $70 oil.

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  20. Interesting, the timing of when these oilers rolling over off the recent trend line test.

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  21. Is there a replacement for oil, Cold Fusion or something? Or are global economies too weak to absorb supply?
    I have a stink bod on JONE, mainly b/c it's trading at less than book. Not sure if oil goes straight to $50 or not but have to conserve some cash in case.
    http://www.merrilledge.com/publish/content/application/pdf/gwmol/Equity-Strategy-Focus-Point-November-2014.pdf

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  22. JONE - In @ $10.22, will flip this on a rebound unless LGCY drops into upper $15's

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  23. GM - Buffet has something up his sleeve, perhaps?

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  24. CLR. That one actually makes sense.

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  25. GDP/OAS..I don't know either of these. Maybe for a reason?

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    1. Yeah I dunno about OAS, just what BACML said but could be they are peddling it for a client.

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  26. BACML also have INTC and WMT on their buy list and spoke well of them. I guess lower classes who benefit most from low oil should buy GM vehicles instead of high end Mercedes and BMW?

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  27. DG - Persistent low oil should provide a tailwind for DG as well I'd think, b/c their clientele are also lower class.

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  28. WMT - Brandt recently pointed out the breakaway gap at $80, with a prediction for further gains based on the chart. I'll add to that WMT's clientele should benefit from persistent low energy prices.

    So a breakout and run for WMT portends consistently low energy.

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  29. MAT - Ho, ho, ho, toys for under the kids Christmas tree?

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  30. GDP - If you were Johnny on the spot this morning you'd have a reasonable gain at this point. That's about all I know about/for GDP.

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  31. So let's see, mom and pop are going to be forced to spend as opposed to save b/c rates are so low they get creamed if they buy "T"'s, right?

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  32. BOBE - Time for a little retreat maybe?

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  33. PIR - I dunno, can any of the gaps down actually close next year or beyond?
    BLMN - Ring the Christmas dinner bell?

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  34. (a) RSX (Russia) plunges -5.57% as the ruble hits a new low against the dollar (and the drop in crude ensures a blow to their economy).
    (b) EWZ (Brazil) -3.3%. FXI (China 'H' Shares) -0.8%.
    (c) EEM (Emerging Markets) -2%.
    (d) XLE (Energy) -6%, OIH (Oil Services) -9%, DBC (Commodities) -4.6%.
    (e) GDX (Miners) -6.2%.

    I haven't seen selling this brutal outside the mining sector in a long, long time. I plan to close RYEIX and RYVIX end of day (and of course I 'should' have taken the hits on Wednesday> my 'bad' for bypassing discipline in favor of my 'take' on sentiment). Markets close early today (for which I'm grateful!), as I expect selling to accelerate throughout the session and again on Monday. Definitely happy to have taken gains on RYPMX (Precious Metals), RYMBX (Commodities), and RYWVX (2x Emerging Markets) earlier in the week, which takes the edge off an otherwise bleak session. Today's hit will likely take the portfolio back to mid-October levels. Will cooler heads prevail on Monday? Maybe. But that wouldn't be my bet.

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    1. I closed GDP around 7, not sure about my wife. Live by the sword, and all that.

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  35. MXC - Oh my, trend line reversal. Now if that's not a total surprise I don't know what is.

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  36. Jeez I go out for a round of golf and you can't hold stocks up? What's up with that!?

    I got stopped out of YELP at $57.90. FCAU took on a little water while F and GM rallied nicely. Heckuva day for GM.

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  37. It could all be worse I guess: EMES SLCA HCLP were 3 stocks I've watched closely for entries and have even made some money on day trades...those were decimated today.

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  38. (a) RSX (Russia) closes down -5.51%.
    (b) EEM (Emerging Markets) closes down -2%.
    (c) DBC (Commodities) -4.58%.
    (d) GDX (Miners) -8.7%. (Gold setting up for its own High Noon this Sunday as Switzerland votes on gold reserves.)
    (e) $USD +0.83%.
    (f) Crude futures -10%.
    (g) XLE (Energy) -6.42%. OIH (Oil services) -8.9%. Not quite the Armageddon I was braced for.

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  39. Even with that big month-end commodity carnage, the TSX was still up 1% for November and the S&P was up 2.7%, so a good overall month still.

    Been starting to think about what 2015 will hold. Looks like the S&P 500 will have a good 2014, but nothing outrageous, so could have another good year next year. Smallcaps having a flat 2014 after an outstanding 2013 (not a surprise), so maybe their turn again next year.

    Europe still relatively undervalued and making progress, so may be an outperformer next year. Canada may also surprise to the upside even with weak oil as the weak Cdn $ helps manufacturing, etc. sell more.

    Lots to think about for sure,

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  40. INVN - Okay, so what's up with this one?

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  41. BXE/JONE - Why the exact same % down today, both lost 17.55%?

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