When 90-year-old Saudi King Abdullah was hospitalized two weeks ago, the local stock markets crashed and oil volatility expectations surged as we noted at the time, a new king could do almost anything he wants (including changing oil policy). As Reuters' Mohammad Bazzi explains, Abdullah's 79-year-old half-brother has his own health issues and leaves larger questions over the line of succession in one of the world’s most important oil producers remain unanswered.
We see far too much complacency out there when it comes to interest rates, in the same manner that we’ve seen it concerning oil prices. We live in a new world, not a continuation of the old one. That old world died with Fed QE. Just check the price of oil. There have been tectonic shifts since over, let’s say, the holidays, and we wouldn’t wait for the ‘experts’ to catch up with live events. Being 7 weeks or two months late is a lot of time. And they will be late, again. It’s inherent in what they do. And what they represent.
This wasn't how it was supposed to be? Collapsing crude oil prices - according to the mainstream (Fed-spoonfed) narrative means lower costs for business and 'massive' tax cuts for consumers enabling disposable income to surge. But, American Airlines just announced a 3.4 percentage point plunge in its load factor (ability to fill its planes) in December and while Southwest saw traffic rise, its load factor also fell as passenger revenue per seat tumbled 4-5%. So no extra spending... and now United reports it is looking to outsource 2,000 jobs in a cost-cutting effort (which seems odd given the total collapse of the fuel cost overhead?). Oh well, just keep repeating - crashing oil prices are unambiguously good.
Over the past 30 days sell side analysts that cover the Energy sector have been busy cutting their earnings estimates to reflect plummeting crude prices. They’ve snipped an average 3% from their Q4 2014 numbers for the 10 largest cap names, and slashed 19% off their 2015 whole-year estimates. Common wisdom has it that these reductions should shift over to the both Consumer sectors – Staples and Discretionary – driving estimated there higher. That isn’t happening. Over the same 30 day period, the analysts that follow the largest names in these groups haven’t moved their estimates for either Q4 or 2015 by even 1%.
For all those who have forgotten that the I in the GDP equation stands for Investment, here is a reminder courtesy of the latest crude collapse victim, Suncor, which moments ago announced it is not only cutting its 2015 CapEx by $1 billion (as in I, directly and adversely impacting US GDP by the same amount) but that it would also cut "operating expenses" by up to $800 million, and, drumroll, implementing "a series of workforce initiatives that will reduce total workforce numbers in 2015 by approximately 1000 people, primarily through its contract workforce, in addition to reducing employee positions. There will also be an overall hiring freeze for roles that are not critical to operations and safety." Or as Joe LaVorgna and all the other mainstay CNBC "analysts" would call it, "unambiguously good."
The Russian Ruble is re-crashing again today (higher by 3 handles and back above 66 RUB to the USD) as crude oil continues to plumb new depths. Having found some strength - via intervention amid 'stability' in crude prices in late December - the selloff since Christmas has been dramatic in both the Ruble and Crude. However, the contagious impact of this massive Ruble devaluation is, as Bloomberg reports, making life tougher for India's steelmakers. "In the past month or so, deals have been struck for steel imports from Russia," notes one steel industry executive, adding that such purchases "will only increase," as lower Russian prices "will be a threat to Indian steel mills."
The touts have it backwards. This isn’t about greeters at Wal-Mart handing out tax cuts to hard-pressed American consumers. Its about the coming liquidation of the massive malinvestments and bloated economies that have been enabled by rampant central bank money printing and the resulting madcap expansion of unrepayable debt. Buying-the-dip was always a strategy that would work until it didn’t. The “oil tax cut” tale is designed to ensure that Wall Street’s Muppets will be the last to get the word.
In a globalized and financialized world, financial disruption, which is what a “rising” dollar signifies, is not an independent paradigm. The more prices trend exactly opposite of how “stimulus” is supposed to work, the less these convolutions will hold up whereby, eventually, reality sets in. The significance of the action in December is that there are no more lines in the sand left to defend the “honor” of monetarism; copper isn’t anywhere near $3 anymore and the long-predicted crude oil bounce to $70 is instead $45 and falling. Only equities remain, and at these valuations they signify nothing but the folly of the artificial economy. The more this goes on, the more it looks like 1937 lives again.
Now that even the pundit brigade has confessed that crashing crude may not be the "unambiguously good" event all of them had sworn as recently as a month ago it surely would be, and stocks are finally comprehending that plunging oil may well be rather "unambiguously bad" because without EPS growth (energy is well over 10% of S&P EPS), without multiple expansion (rumor has it the Fed will hike this year), without a jump in stock buybacks (energy companies account for 30% of the buyback growth in 2015 according to Goldman) and without a boost to GDP (energy capex plans are imploding), the only way is down. But there was one key element missing from the "bad" scenario: impaired banks. At least until now, because as Reuters reports, Asia-focused bank Standard Chartered is the first (of many) bank facing billions in losses resulting from the crude crash.
From almost $30 differentials in 2011, today's bounce in WTI has pushed the Brent-WTI spread negative for the first time since July 2013 briefly (and August 2010 consistently). This is, as the chart below shows, more 'old normal' as pre-QE the Brent-WTI spread oscillated in a very narrow range...
Sure... why not. US equity markets went vertical in the pre-open and followed through as cash indices opened. This ramp drags stocks back to unchanged from the pre-payrolls level on Friday... It should not surprise anyoine that the ramp coincided with a USDJPY liftathon and yet another bounce in crude oil prices...
Despite the collapse of several key industries (cough Steel & Construction cough), as we have discussed in detail related to the record number of VLCCs charging towards China, Chinese crude oil imports surged by almost 5 million barrels in December - the most on record. This 19.5% surge MoM (and 13.4% YoY) indicates significant efforts to fill the nation's strategic reserve but - absent this 'artificial' demand - spells problems for an already over-supplied global oil market (and its near record contango).
- Oil Drops Below $45; U.S. Stockpiles May Speed Collapse (BBG)
- Pound Drops as Traders Write Off Higher Rates on Inflation Slump (BBG)
- Oil prices down again as UAE defends holding production (Reuters)
- The Politics Behind the ECB's Threat to Cut Greece Funding (BBG)
- France dispatched thousands of police and military personnel to protect synagogues and Jewish schools, as the government warned of continued terror threats after three days of deadly violence (WSJ)
- Chinese Car Dealers Find Days of ‘Printing Money’ Ending (BBG)
- Gold Rises to Highest Since October as U.S. Rate Outlook Weighed (BBG)
- Divers retrieve crashed AirAsia jet's cockpit voice recorder (Reuters)
So far today has been a replica of yesterday, with the crude rout continuing and pushing WTI under $45, but largely ignored by the FX carry pairs, and thus equity futures, which have seen some positive momentum from overnight trade data out of China where exports jumped 9.7% beating the 6% expectation, while imports fell 2.4% compared to a projected 6.2% decline as the trade surplus narrowed from November’s record $54.4 billion. For the full year, however, Chinese trade grew at just 3.4%, missing the government’s target of 7.5% growth for the third year in a row as the government quick to blame the slowing global economy. In any event, the USDJPY is well off the overnight lows which means the EuroStoxx is up some 0.8% which, just like yesterday, the E-mini is up some 9 points and rising. It remains to be seen if, just like yesterday, US equities will crash at a precipitous pace after the open, once algos realize that nothing at all has changed.