Saudi Oil Production at Record Levels

“There are many ways to short oil or oil equities based on your risk tolerance and level of sophistication. If you are long oil, we recommend you take down both equity or commodity exposure to crude. Our WTI target is $42-$44 over the next month, $35 over the next three months. Oil is a STRONG SELL in our view.”

The Bear Traps Report, August 18, 2016

 

 

 

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Monthly OPEC Oil Production

August, Million Barrels Day

2016: 33.7*
2015: 32.1
2014: 30.4
2013: 30.1

Bloomberg

*OPEC was producing at record levels in August, even as global oil inventories are at multi- year highs.  If you’re the lowest cost producer (Saudi Arabia), why subsidize highly levered / high cost producers when you can just put them out of business?

 

“Breaking: Saudi, Russia Pledge Oil Cooperation Without Agreeing Freeze”

September 5, 2016

Since the highs of August 19th, oil plunged 11% globally.  In recent weeks, markets have witnessed rumor after head fake.  Around the world, some crude policy makers have been desperate to get prices higher.

Today, two of the largest oil producers on earth pledged to “cooperate” to stabilize global markets, while failing to announce any specific measures to bolster prices.

No concrete plans were announced at the joint press briefing in Hangzhou, and Al-Falih later told Al Arabiya television there’s no current need to cap production.

Flashback

“Breaking:  Russia, Saudi Arabia set up working group on oil, gas cooperation.”

November 26, 2015

Meanwhile, Iran is Hitting the Oil Production Gas Pedal, Reuters

File_000 (86)

Up on Euphoria, Down on Impatience

Today, after a 5% surge, oil pared gains (+0.81%) on speculation Saudi Arabia and Russia might detail a plan to drive up prices, markets later said; “where’s the beef?”

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Brent Saudi RussiaCreating temporary short squeezes has become a national summer past time in some oil producing nations.  Over the years in oil markets one thing has become very reliable.   When you see “plans” with few ambitious announcements, there’s typically a lack of decisive follow-up action.

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Insider Trading in Rates

“Yesterday, the U.S. 10 year treasury bond hit our long held 1.40% target.  A sea of bond bears has become an ocean of bulls.   Brexit’s risk to the global economy has created an opportunity for those willing to step in and short bonds in the face of a large group of clowns rushing to the exits (abandoning their long held bearish bond positions).”

Bear Traps Report

July 6, 2016

 

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Rich Stocks
Equities remain extremely expensive.  A look inside the S&P 500 shows the median stock trading at a record PE of 21.3x, this is through the 1999 dot com highs, nosebleed levels.   SEC filings show, Warren Buffett’s cash position has risen from $48B in 2014 to $73B today.  The Oracle of Omaha has NEVER had more dry powder, he’s armed and ready for a large sell off.
 Jobs Friday

Government Jobs: June – August 108,000
Three Month Average: 232,000

Employment growth was weaker than consensus estimates at +151k in August, but above Fed estimates of the breakeven rate.

Japan 10 year North

As U.S. bond yields are moving higher, so are those around the world.

U.S. companies kept adding to payrolls in August while measures of slack in the labor market were little changed, signaling steady hiring in the face of lackluster global growth.

“Our economists therefore see this report as just enough for a large majority of officials to support a September rate increase and have raised their subjective odds of a hike this month to 55% from 40%. They have also lowered their subjective odds for December to 25% from 40%, leaving the cumulative odds of at least one hike this year at 80%. ”

Goldman Sachs

US 10s Wedge

Notice the yield price action in US 10s.  Sixty days ago every sell off was greeted by a stronger bid for bonds.  Today, it’s a 180, every rally in bonds has been over-powered with selling, yields want to move higher.

Bear Traps Report estimates suggest that G4 central bank (ECB, BOE, BOJ) has contributed for nearly 105bp (1.05%) of the reduction in US 10-year yields since the end of 2013.

Jobs and Economic Growth

Bloomberg reported payrolls climbed by 151,000 last month following a 275,000 gain in July that was larger than previously estimated, a Labor Department report showed Friday in Washington. The median forecast in a Bloomberg survey called for 180,000. The jobless rate and labor participation rate held steady, while wage gains moderated.

image (8)August has been light in recent years, so the market was ready for weakness.

The August figure is consistent with a simmering-down of payrolls growth so far this year as the economy slogs through a period of weak investment and some companies have difficulty finding workers. Federal Reserve officials will have to weigh the jobs data as they decide whether to raise the benchmark interest rate for the first time in 2016.

GDP

Led by a substantial inventory overhang, in recent quarters, U.S. economic growth has suffered, we’ve seen a pull back in business fixed investment. Last Friday, the second release of Q2 GDP reaffirmed the soft signal from the Bureau of Economic Analysis’ preliminary estimate showing modest growth of +1.1% (qoq ar).

On the other hand, Wall St’s economists expect above-trend growth in Q3 (+2.8% to +3.2% qoq ar) and Q4 (+2.1% to 2.5%), as a turn in the inventory cycle, continued strength in consumer spending, and a bounce back in residential investment offset any lingering weakness in capital spending and drag from trade. Beyond this year, they expect growth to slow to an only slightly above-potential pace of 2% over the course of 2017.

 

2s Pre Jobs

Someone had the light jobs number early as U.S. two year yield came off aggressively, as bond buyers came into the number.
Jobs Day Recap
•NFP number was 151,000 for the month of August, below the 180,000 estimate
•The Unemployment rate was steady at 4.9%
•Revisions to both June in and July showed 1000 less jobs created than initially reported, very marginal.
•3 month average for job gains at 232,000 (strong)
•12 month average for job gains at 204,000 (strong)
•A little worrying that total private was much softer at 126,000 vs 225 last month
•Much of the losses in jobs were seen in mining which continues to weigh, something the Fed has already priced in.
•Many service sectors showed continue growth.
•In government we saw 25,000 jobs added, seasonally strong. Now 108,000 government jobs over past three months!
•Many of the more structural indicators such as discouraged workers, participation rate and long term unemployed were almost unchanged.
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Breaking Point

“Yesterday, the U.S. 10 year treasury bond hit our long held 1.40% target.  A sea of bond bears has become an ocean of bulls.   Brexit’s risk to the global economy has created an opportunity for those willing to step in and short bonds in the face of a large group of clowns rushing to the exits (abandoning their long held bearish bond positions).”

Bear Traps Report

July 6, 2016

The Fed is playing a very dangerous game.  They will do anything to protect their beloved Hillary Clinton’s 2016 election hopes, but in doing so they risk financial instability.  When you get too close to the edge one often gets burnt.   Colossal stakes are on the line.  The 10 year U.S. Treasury hit a yield of 1.63% this week, a seller’s panic has begun.  As long term bond bulls we turned bearish in late June, recommended our clients SELL bonds.

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A Warning from Jackson Hole 

Friday morning, in classic fashion our favorite “labor market” economist in Janet Yellen talked up the U.S. economy.   Yellen reiterated her belief that the U.S. is nearing full employment and meeting their goals.  Heading toward the 2016 election, the Fed’s cheerleading has become a double edged sword.  Central bankers have been talking up the U.S. economy, but in doing so they risk waking up the beast within global equity markets.

Over the last year, every time the Fed has tried to raise rates stock market volatility has surged dramatically.  There’s over $10T of debt globally tied to the U.S. dollar, commodities and emerging markets.   As the Fed has kept rates near zero for eight years the easy money gravy train has exploded in size.  Every second they’ve kept interest rates too low for too long, capital has oozed into places it just shouldn’t be.  As the Fed tries to exit the “lower bound” the U.S. dollar surges along with systemic credit risk.  As we said in January, “the Fed will NOT hike rates this year, but they will try (and fail) to get one in. ” It’s the beast in the market that will stop them once again.

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Bloom Dollar

The global wrecking ball that is the U.S. dollar surged Friday.  After over two months of public silence about her views, Yellen pointed to “continued solid performance of the labor market.” 

VIX Range New

The Fed chair also emphasized the “case for an increase in the federal funds rate has strengthened in recent months” in her speech Friday to central bankers and economists in Jackson Hole, Wyoming.  Complacency had taken control over equity markets globally this summer.  Friday we witnessed a rare surge in volatility, for the first time in months the VIX traded in a 23% range.

us 10s breakout

U.S. ten year Treasuries hit 1.63% today, the highest mark in 3 months. 

Just as the very last bond bear turned bull, Treasuries now in the throes of the most significant sell off this year

“We’re reasonably close to what is thought of as full employment.  The inflation rate this year is higher than last year’s.  It’s still not up to 2 percent. But it’s been growing.”

Stanley Fischer

WIRP SeptFed fund futures have shifted from a 13% chance of a rate CUT in (post Brexit low) to a 43% chance of a rate HIKE in September.

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Breaking: Fed’s Fischer Hints at a Hike

“For the rest of the year, we think global credit risk will veto the Fed’s policy path (no hikes) and therefore, gold and the gold miners are going to do very, very well in that environment in 2016.”

Bear Traps Report’s Larry McDonald, January 2016 on CNBC

Aspen Institute in Aspen, Colorado on Sunday

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Today, Federal Reserve Vice Chairman Stanley Fischer said the U.S. economy moving ever so near to the central bank’s objectives and he expects growth to pick up in the future.

As a key member of Janet Yellen’s inner circle Stan Fischer’s words carry 10x the weight of non voting, regional Fed bank presidents.

Air Pocket

Considering over 3000 current Dow (Dow Jones Industrial Average) points are supported by the easy money Fed gravy train, we recommend keeping yours eyes and ears on him.

Gold vs Dollar

The Bloomberg dollar index is off 3% over the last 20 days while gold has been stuck in a trading range.

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“We are close to our targets..  Looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes.”

Stanley Fischer

Over 547,000 new jobs have been created in June and July, so why is the Fed so cautious on the 2016 rate hike?

Fed’s Fischer

U.S. Job Market:  “remarkably resilient”
U.S. GDP Growth: “mediocre at best.”

Fischer trying to balance out is speech here.

December Rate Hike vs Bloomberg Dollar Index*

Today: 52% vs 1166
Month Ago: 43% vs 1198

*weaker dollar with higher rate hike probability

Bloomberg data

We’re witnessing a remarkable divergence between the U.S. dollar and Fed Fund Futures.  The dollar has plunged 3% over the last 20 days while the futures market is pricing in a much higher chance of a December Fed rate hike.

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Fischer Balancing Hawkish Comments with Dovish Concern

“A 1.25 percentage point slowdown in productivity growth is a massive change, one that, if it were to persist, would have wide-ranging consequences for employment, wage growth, and economic policy more broadly,”

Stan Fischer

Fed Fund Futures vs Fed Dots*

Effective Fed Funds

Today: 0.40%
2017: 0.65% v 1.60%
2018: 0.78% v 2.36%

*Fed’s projections on rates

Bloomberg data

The futures market is giving the Fed the Rodney Danderfield, “no respect”.  Traders are pricing in just one rate hike between now and the end of 2018.  On the other hand, the Fed dots are pointing to seven rate hikes over the same time frame.  This disconnect cannot stay this wide, it’s unsustainable.

Fed officials next meet Sept. 20-21.   We will listen closely for additional clues on timing when Fed Chair Janet Yellen speaks Aug. 26 at an annual in Jackson Hole, Wyoming.

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A Valley Full of Bulls

From the Bear Traps Report in February:
“Today, we see bears everywhere… we want to put money to work where we see the most compelling risk / reward.  We think oil and the energy names are becoming attractive again. It’s time to buy fear.”
 
– Bear Traps February 11, 2016 (WTI – oil touched $26.05 that day)
 
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In recent years sell side dealers like Goldman, Bank of America and Citibank have been aggregating their client holdings data from their respective prime brokerage units.

After a look under the hood, they analyze the data to come up with themes and trends.  We spend a lot of time reading street research and developing our own conclusions, most of all looking for crowded trades.  Since late 2013, the one investment strategy that’s been very successful has been found in determining in what moments too many investors are crowded on “one side of the boat”.  With rates near zero globally, returns have become harder and harder to come by, the net result is a lot of clowns stuffed into one corner of the market reaching for alpha.

Phone Booth

“In the first six week of Q3, funds raised equity market exposure sharply, bringing net leverage near 12-month highs through a combination of record call option buying, longer net futures exposure, and short covering in addition to adding leverage in their favorite long stocks.”

Goldman Sachs

With the market at all time highs we’re seeing a significant amount of chasing.  Those who didn’t have the courage or the wisdom to buy the Brexit fear lows are piling into stocks at the fastest level in over a year.    We’re seeing surge in net long exposure to 65%, approaching the highest levels in 12 months.

S&P 500

Today: 2183 (Net Long Exposure 65%)
Feb Lows: 1810 (Net Long Exposure 47%)

Goldman, Citi, BofA data

In February, net long exposure was below 50%, the hills were full or bears.  One by one, as the timid bulls came out of hiding, the market has surged higher and higher.

The Herd is Levering Up

In recent weeks, on top of adding leverage through cash equities, call option volume rose to record levels, hedge fund S&P 500 futures exposures climbed by $15 billion.

Shorts Carted Out

We often hear “this is the most hated bull market of all time.”

This is absolutely not true!  A look at the S&P 500 shows share of equity market capitalization “held short” is at 12 month lows.  If fact, shorts are 20% lower since September and have come down 16% since the February lows.  Lets NOT kid ourselves, many shorts have taken their ball and gone home.

Everyone Wants to BUY Calls, You Can’t Give Away Puts

Put Call

One thing we stress to subscribers is DON’T over trade.  Over the last 3 years if you sat in the boat and waited for real fear, then put money to work, you’re likely doing better than the market.   Of course, this is easier said then done.  The Put-Call Ratio has been a solid buy signal.  We recommended subscribers buy both the Brexit and China devaluation panic.  One reason why is found in the put call ratio.  Since late 2013, if you bought stocks while everyone is buying puts you have done very well.

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A Tale of Two Cities

A Tale of Two Cities

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As the S&P 500 rages higher with reckless abandon, U.S. consumer confidence sits in fear.  Central banks are kissing stocks while hanging the little guy out to dry.

A Very Strange Divergence

Consumer ConfidenceThe University of Michigan’s consumer sentiment for the United States came in at 90.4 in August 2016 from 90 in July but well below market expectations of 91.5, preliminary figures. Consumer expectations improved firmly while current conditions deteriorated. Consumer Confidence in the United States averaged 85.92 from 1952 until 2016, reaching an all time high of 111.40 in January of 2000 and a record low of 51.70 in May of 1980. Consumer Confidence in the United States is reported by the University of Michigan.

U.S. equities and the consumer have been tied at the hip until now…

What does this mean for stocks?  Join us here:

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Warning Signs

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Interesting Divergence

From the July Highs

Dow Jones Industrial Average: Unched
Dow Jones Transportation Average: -3.0%
General Electric: -5.5%

Bloomberg

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There were a lot of happy faces last week when the Dow and S&P 500 got back on record highs, but hold the high fives.

Both General Electric and the Dow Jones Transportation Average have NOT confirmed the celebration.  Even more challenging, the CBOE Volatility Index is 4.5% ABOVE this month’s low, another NONE confirmation.

DOW GE TranniesYears ago, back in our Morgan Stanley days Barton Biggs warned us of the “GE – Transports non-confirmation omen.”  It’s a classic sign that unsustainable factors are holding up stock prices, not solid fundamentals.  We have an equity market positioned on a loose clay foundation with NO sign of bedrock.

Our 21 Lehman Systemic Risk Indicators are telling us something, pick them up here, click on this link:

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VIX Now Up 9% off this Month’s Low

VIX 15 Day

Spread between UX2 (2 month VIX Future) and UX8 (8 month VIX Future) back out at 4.64, widest since November 2013. LOTS of vol sellers out there on a lazy August Monday.  The curve is crazy steep, rich contango.

Core PPI Plunge

The Labor Department said on Friday its producer price index for final demand dropped 0.4 percent last month, the first decline since March and the largest since September 2015. It increased 0.5 percent in June.

CORE PPI

In the 12 months through July, the PPI slipped 0.2 percent after rising 0.3 percent in the 12 months through June. Economists polled by Reuters had forecast the PPI edging up 0.1 percent last month and gaining 0.2 percent from a year ago

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