Archive - Jan 2015 - Story

Last week we focused on potential manipulations of the opaque and self-regulated process by which the conflicted members of ISDA’s Determinations Committee (“DC”) determine whether a triggering event has occurred. This week we will focus on the inherent problems in the External Review process, as set out in the Determinations Committee’s rules.

The only other times that Bloomberg's broad-based (i.e. not all OPEC's fault) Commodity Index has fallen so far so fast was in 1999 (before stocks crashed) and 2008 (before stocks crashed). At 12-year lows, the raw material of the world's economies is flashing a big fat red warning signal that all is not well (despite stocks being a 'smidge' off record highs). WTI traded with a $45 handle... but apart from that, everything's great (oh wait and the 230 pip USDJPY roundtrip). Amid all this turmoil, gold just broke to $1235 - its highest in a month.

Here is the chart which we affectionately call the scariest chart for the US shale industry - namely the US rig count drop, which as Goldman notes, "is faster and larger than in any other bear market."
That's not why it is scary. The reason why is that the current rate of rig collapse is nowhere near enough. In other words, before the new pricing equilibrium can be established, virtually the entire US energy sector in its current appearance will have to be wiped out!

The Long/Short Strategy for the New Reality
1. Go long companies that cater to the 1%.
2. Short companies that cater to the middle class.
3. Go long companies that cater to the poor.

There was one world leader who was out of step with the rest of political elite during yesterday's theatrical procession of world leaders for French unity and for press freedom (even as the bulk of them engage in prosecution of freedom of speech across their own nations): Israel's prime minister Benjamin Netanyahu. In fact, as Reuters reports, he managed to "ruffle a few feathers while taking part in the "Charlie Hebdo" rally in Paris on Sunday" because this was an event his office initially said he would not be attending following a specific request form French president Hollande not to come to Paris, but ultimately ended up participating in much to the Chagrin of the French president.

In what appears to be a desperate attempt to boost confidence in a failing financial system taken right out of the 2011/2012 playbook, over the weekend the National Bank of Greece had its latest "subprime is contained" moment and loudly announced that "the situation with deposit outflows from the country was under control" as it tried to reassure markets ahead of a Jan. 25 snap election, reports Kathimerini. And while Greek deposits may or may not be "running" one thing is certain: with an increasing probability they may not have a "continuity-promoting" government in less than two weeks, Greeks tax remittances to the government, which were almost non-existent to begin with, have ground to a halt!

Well that escalated quickly: This is the biggest drop in the S&P during the first few minutes of trading since at least 2012, a move which has all but erased the gains from Charlie Evans' "catastrophe" call last week.

Adjusting Warren Buffett's favorite indicator for 'the giant con that America is still enjoying growing economic prosperity - predicated on debt being the bridge between rising GDP and a declining economy' suggests today’s true market valuation is more than twice the previous all time high in 2000.

Two days after the dramatic and tragic events from Friday, Amedy Coulibaly, who in coordination with the two brothers who attacked a satirical newspaper and said they were affiliated with al-Qaeda, killed four hostages at a Paris supermarket Friday before he was slain by police appeared in a new posthumous video released on Sunday, on which he pledging allegiance to the Islamic State group and explained the planning and the reasoning behind the attacks that sowed terror across France.

Despite calls for a bottom all the way down from $90, $85, $80, $75, $70, $65, $60, $55, and then $50... crude oil prices (both Brent and WTI) are now below that crucial level (and as Kyle bass notes, even very wealthy nations like Saudi Arabia and Norway are going to have to tap into their sovereign wealth funds to support their annual budgets this year or next). WTI is trading with a $46 handle once again (at fresh cycle lows), and Brent is trading oince again at fresh cycle lows with a $48 handle.  Just as worrying away from the apparently OPEC-over-supplied (and nothing to do with demand) oil complex, copper prices just broke below $6000/mt for the first time in 5 years (which 'over-supplier' will get the blame for that? Or is it really about demand after all, just as Saudi Prince bin Talal warned). And don't mention Iron ore, Steel, Aluminum... which all hit new cycle lows...

Today's chart of the day comes courtesy of Reuters Jamie McGeever, and it shows that based on a BofA analysis, US stocks have never in history been more expensive relative to the rest of the world, surpassing both the dot com bubble and the housing bubble.

• Earnings Pessimism Jumps as Oil Threatens S&P 500 Growth (BBG)
• It’s Amateur Hour in the Booming Chinese Stock Market (BBG)
• France mobilizes 10,000 troops at home after Paris shootings (Reuters)
• European Stocks Gain With S&P 500 Futures While Oil Drops (BBG)
• Nasdaq Looks to Operate Dark Pools for Banks (WSJ)
• This Guy Called Bonds in ’14. You Listening This Time? (BBG)
• Paris attacks boost support for Dutch anti-Islam populist Wilders (Reuters)
• OPEC price war in Asia intensifies as oil falls below $50 (Reuters)

If you, like the BIS, are sick and tired of central bankers, and in this case the ECB's endless jawboning and now daily QE threats, determining the level of stocks, well then today is a good day as any to take your blood pressure medication. Because first it was ECB Governing Council member Ignazio Visco who told German newspaper Welt am Sonntag that the risk of deflation in the euro zone should not be underestimated and urged the bank to buy government debt, and then, yet another regurgitated story, came from CNBC whose "sources" reported that the ECB QE would be based on contributions from national central banks and paid in capital. And while otherwise the cross-correlation trades would have at least pushed the crude complex modestly higher, today it was Goldman's energy analyst Jeffrey Currie finally throwing up all over oil, with a report in which he said that "because shale can rebound quickly once capital investments return, we now believe WTI needs to trade near $40/bbl for most of 1H15 to keep capital sidelined."

Speaking to his favorite money-honey, billionaire Saudi Prince Alwaleed bin Talal told Maria Bartiromo that the negative impact of a 50% decline in oil has been wide and deep. As USA Today reports, the prince of the Saudi royal family said that while he disagrees with the government on most aspects, he agreed with their decision on keeping production where it is, adding that "if supply stays where it is, and demand remains weak, you better believe it is gonna go down more. I'm sure we're never going to see $100 anymore... oil above $100 is artificial. It's not correct." On the theory that the US and the Saudis have agreed to keep prices low to pressure Russia, the prince exclaimed, that is "baloney and rubbish," adding that, "Saudi Arabia and Russia are in bed together here... both being hurt simultaneously."