Posts by The Trend Letter

isis

Rising tensions, what does it mean for investors?

Unfortunately, our forecast over the past couple of years for increased geopolitical tensions is coming true.. We have stated a number of times that when ruling governments are in dire financial shape, the politicians realize that they have no solution to solve the financial problems, so they often look for diversions to take the focus away from them.

Certainly Russian President Putin has been a master of these diversions, first invading Ukraine & now with his move in Syria. We are also very suspicious of why Turkey shot down a lone Russian jet. Seriously, there is no way they would have thought that if Russia wanted to attack them, Russia would only send one jet.

Turkey is in horrible shape financially, so we have to wonder if they want to use this incident to unite the people against Russia & divert their attention away from their domestic problems. As more & more countries fall deeper in debt, watch for more of these provocations against other foreign countries.

These politicians feel trapped & they are very dangerous as their main goal is to maintain power at any cost.

This shooting down of a Russian fighter jet follows the ISIS-led attacks in France & the downing of a Russian airliner, & likely the hotel strike in Mali.What we are seeing is a rapidly spreading of attacks, no longer isolated to just the Middle East. .

Who is ISIS?

We hate to use the term ‘terrorist’ to describe the Islamic State of Iraq & Syria (ISIS) because ISIS is far more than some terrorist group, we must think of ISIS as a country. It has a functional government, complete with Ministries of Education, Culture, Justice, Transportation, Energy & military.

ISIS controls a territory almost as large as Britain, lying between eastern Syria and western Iraq. Its headquarters are in  the city of Mosul, a modern, bustling metropolis larger than Philadelphia.

The Islamic State is a well-run organization that combines bureaucratic efficiency & military expertise with a sophisticated use of information technology.  ISIS claims to be the new caliphate & that its leader, Abu Bakr al-Baghdadi, is the caliph.

A Caliphate is a form of Islamic government led by a caliph – a person considered to be the political & religious successor to the prophet Mohammed, & therefore the leader of all Muslims worldwide.

So ISIS is not some terrorist cell that hides in the mountains, it is a very sophisticated organization & it is spreading its reach worldwide.

The rise of ISIS is tearing Europe apart

With its attack on Paris, downing of the Russian jet, & many more attacks to come, ISIS is putting Western countries on alert. Nowhere are the effects being felt more than in Europe.

In addition to the heavily fatalities, of which there no doubt will be more, the financial impact to Europe is going to be massive. With an already declining economy, & high unemployment, Europe is now being swarmed by over 1 million migrants & refugees fleeing the war-torn Syria.  The total numbers could ultimately be several million.

The future of Europe’s Schengen free travel zone was cast into doubt on Friday after France declared that it would impose border controls indefinitely. Germany, Austria, Denmark & other states resurrected long-abandoned border controls in a bid to control the influx of hundreds of thousands of migrants this summer.

As Jean-Claude Jonker, President of the European Union stated, the single currency cannot survive if the free movement of people granted by the passport-free travel zone ends.

“If the spirit leaves our hearts, we will lose more than Schengen. A single currency does not exist if Schengen fails. It is not a neutral concept. It is not banal. It is one of the pillars of the construction of Europe.”

What should investors do?

Typically during during volatile times investors seek out safe havens, such as cash & government bonds. But what happens when it is government that is the problem?

After decades of running massive deficit budgets in virtually every major country, the world is drowning in more than $200 trillion of debt that can never be repaid. So while ISIS & global tensions are contributing to the demise of Europe, it is the level of debt that will be the root cause of the coming Economic Crisis.

Very soon we will see the first of many Sovereign Debt Defaults globally. The first domino will likely be Greece, or Hungary, or Poland or?? It doesn’t really matter who the first one will be. But as soon as the first one declares that it is bankrupt, investors will look around & ask ‘who’s next’?

When people no longer trust the state, the monetary system collapses. It is the result of the collapse in confidence in government.That is when contagion will ramp up, & that is when investors will stampede out of public investments (government bonds) & into private investments (equities, collectibles, fine art, commodities, & precious metals).

To survive & even prosper during volatile economic times we need to follow the global flow of capital. We keep hearing & reading analysts declaring that the US Dollar is going to collapse. Sure the US Dollar will EVENTUALLY collapse, but it is not the problem today. It is all about timing.

Think about it. If you were a well off European where would you want your cash? Would you leave it in a European bank, in Euros, or would you want it in a safer place? In times of trouble, capital flees the area where the trouble exists & flows to areas perceived to be safe. Right now, Europe is collapsing before our eyes, as is the Euro.

Yes, we will see corrections as nothing goes straight to the bottom, but Europe & the Euro are in serious trouble. This is why the US Dollar has been on such a strong run, foreign capital is buying US bonds, US stocks, & US real estate. To do that they need US Dollars. It is nothing more complicated than that.

As an investor, you want to have cash & the cash you want is US Dollars. We have advised non US subscribers for over 18 months now to move a good portion of their cash out of their local currency, & into US Dollars. In Canada, all we had to do was open a $US account in our Canadian bank.

The $US will ultimately decline, but not until after the Yen & Euro see significant declines. Two years ago, we predicted that the Euro may not survive this coming Economic Crisis.  As time passes, that prediction is becoming more & more valid.

While we are about to see the largest Economic Crisis in history, for those who understand what is happening & who follow the global flow of capital, this will be an investment opportunity of a lifetime.

Stay tuned!

tanker

Goldman eyes $20 oil as glut overwhelms storage sites

From , Telegraph

The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.

Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.

Oil has fallen from $110 a barrel early last year and is hovering near $40 for US crude, and $44 for Brent in Europe.

The US investment bank said the overall glut in the commodity markets may take another twelve months to clear. It cited ‘red flag’ signals on the Shanghai Future Exchange over recent days. Copper contracts point to “imminent weakening” in China’s ‘old economy’ of heavy industry and construction, it said.

wtivsbrent

The warnings came as OPEC producers and Russian companies fight a cut-throat battle for market share in Europe and Asia. Saudi Arabia is shipping crude to Poland and Sweden for the first time, poaching new customers in the Kremlin’s traditional backyard.

Iraq is selling its low grade ‘Basra heavy’ crude on global markets for as little as $30 a barrel as the country runs out of operating cash and is forced to cut funding for anti-ISIS militias. Iraq is seeking a large rescue loan from the International Monetary Fund. “The drop in oil prices is a difficult test for us,” said premier Haider al-Abadi.

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted.

“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.”

“What has saved us so far is that China has been buying 200,000 to 300,000 barrels a day (b/d) for their strategic reserve,” he said.

oil_stocks

It is unclear exactly how much more space China may have. The Chinese authorities certainly want to keep building stocks – and do so at bargain prices – since reserves cover just 50 days demand, far short of the 90-day minimum recommended by the International Energy Agency. But the new storage depots in Gansu and Xinjiang will not be ready until the end of the year, at the earliest.

Data from the US Energy Department shows that America’s storage sites are 70pc full, in theory leaving room for another 150m barrels. But this is already tight enough to create regional bottlenecks. It will not be sufficient if OPEC continues to flood the global market in a bid to drive out rivals. Excess supply is running near 2m b/d.

Saudi Arabia and its key Gulf allies are staying the course for now, convinced that their strategy is paying off as the fall in the US rig-count leads – with a lag of several months – to a significant drop in shale output. Some $200bn of long-term projects have been cancelled around the world, notably in deep waters, the Arctic, and the Canadian tar sands, but most of this has no immediate effect on prices.

oil rig count

Ali al-Naimi, Saudi Arabia’s oil minister, said global demand is recovering and prices will rebound next year as the market comes back into balance. The greater risk is a lack investment in future supply as the ‘decline rate’ on existing fields accelerates to 4pc a year or even higher. “We need billions of dollars to continue exploration and producing oil,” he said.

The IEA said in its World Energy Outlook last week that it takes $650bn of fresh investment each year just to stand still.

It is an open question whether Mr al-Naimi’s soothing words will assuage Algeria, Venezuela, Libya, Nigeria, Iran, and others when they gather for a fractious OPEC meeting in Vienna on December 4. Saudi assurances that prices would soon rebound have proved wrong time and again over recent months.

The majority of the cartel favours an output cut to stop the pain. The mood is now so tense that OPEC has had to suspend publication of its long-term strategy report, ostensibly due to a dispute over what constitutes a “fair” price but in reality due to a deeper clash over the likely future of the oil industry as renewable technology advances by leaps and bounds, and world leaders commit to sweeping curbs on carbon emissions.

Views are deeply polarized over whether it is even possible to stop the US shale juggernaut in any meaningful sense. Paul Horsnell from Standard Chartered expects oil output in the US to fall by 900,000 barrels next year: enough to clear the glut, given that global demand is rising by roughly 1m b/d.

In stark contrast, Seth Kleinman from Citigroup said US production is likely to remain steady at around 9m b/d next year, so long as prices remain near $50. Output will rise by roughly 300,000 b/d for each $5 increase in price above that.

If so, this is a meagre result for the cartel, which has lost half a trillion dollars of revenue since the oil crash kicked off in mid-2014. Several OPEC states are in dire straits. Even the Saudis have been downgraded by Standard & Poor’s and are facing a budget crunch.

US weekly oil supply

OPEC was slow to understand the rising threat posed by the US shale industry. It may now have misjudged its resilience. Frackers have been quick to cut costs with multiple pad-drilling, and they can revive production relatively quickly as soon as prices recover.

Goldman Sachs said the deeper the fall in oil prices over coming months, the sharper the rebound later, comparing it to the cycles after 1986, 1988, and 1998.

OPEC needs a higher price to fund the social welfare nets and defence spending of its members. The great question is whether US shale will snap back within months and regain its market share as soon as OPEC tries to test the waters again`. This strategic showdown may end in an inconclusive draw.

 

oiltanker

Good indicator why Oil prices continue to decline

We get quite a bit of email questioning our bearish stand with oil. Today oil is trading just above $40, & yes we still expect yo see low $30 oil before we will see $60 oil.

Oil is a classic ‘boom & bust’ sector, & is driven by supply & demand. While every sector experiences bullish & bearish extremes, none experience them more than oil.

pendulum

There is a saying… “the cure for low oil prices is low oil prices.”  Oil price move in distinct cycles, where as prices rise, produces open up the spigots, wanting to capitalize on those higher prices. From January 2011 to November 2015, the price of oil traded between $80 & $115…for oil producers, that’s when they want to ramp up production to reap the gains.

oil4yr

As the prices increased so did production, until starting in November 2014, when the supply of oil started to outpace the demand. It is as simple as that. Historically, when prices declined too quickly, OPEC would step in & slow down production. But this time they didn’t. Because it was the American shale producers who were adding the biggest net production volumes, OPEC, particularly the Saudis, decided to play a game of chicken, keeping the spigots open.

Today we are at a point where all of the storage facilities are full, & we now have an estimated 100 million barrels of oil sitting in tankers at sea, waiting for storage space on land to free up. Much of this oil was owned by speculators who were hoping to profit on the August price decline to under $40. Now they are having to pay for storage on these ships, & you know some of these speculators are sweating bullets as the price flirts with setting new lows.

flotila

While production is still far outpacing demand,  things will change, as the cycle works its way through. We showed this chart a week ago & it clearly demonstrates that US oil producers  have been shutting down capital expenditure (CapEx). They are still pumping out as much oil as they can from current sources, but they are not spending money looking for new sources. We can see here that rig counts have dropped from 1600 a year ago to less than 600 today.

Rig count

On the oil cycle we are now at the level where low prices will force these producers to cut production. Once we get there, then supplies will decline & the pendulum will reach an bearish extreme. But in order to get there, we need to see lower prices. Ultimately, lower pirces will lead to under supply & then we will see prices rise again.

Oil cycle

 

 

 

european-union-sign-200

Petition forces Finland Parliament to debate leaving the Eurozone

We have stated for years that the whole idea of the Euro was flawed & that ultimately the whole eurozone  would break down.

The whole misguided idea behind the Euro was that it would financially integrate Europe, but instead it is tearing the continent apart.  It is also fueling the rise of extremist political parties  & with the refugee crisis, is feeding the onslaught of more & more racism. The massacre in Paris last weekend just adds more fuel to that fire.

We have stated numerous times that the biggest problem with the Euro is that they tried to share one currency & one monetary policy, but they did not the debt. Each countries economy has its own challenges, but they cannot act individually, as their is only one monetary polity.

Where Germany may want a strong Euro, Greece & other peripherals prefer a weaker Euro. The belief was that the federalization of Europe would prevent war, but what we are seeing is growing tensions between member nations.

Now the people are speaking, &  in Finland, after 3 straight years of accelerating economic decline, a petition has achieved the necessary signatures to force the Parliament to debate leaving the Euro.

Read story

global debt

Our final warning on Corporate debt

It used to be that businesses borrowed money to fund plant expansion, research & development, or other long-term production improvement endeavors. These debts typically were self-supportive in that the increased production would generate increase revenues, which paid for the interest on the loan.

Since 2008, thanks to the central banks keeping rates at near 0%, businesses are borrowing at historically high levels. We are seeing $ trillions of being borrowed, but instead of investing into productivity gains, these companies are funding financial maneuvers. Instead of making concrete improvements to their business, they are simply buying other companies to show Wall St analysts that their earnings are increasing, & their share prices move higher.

Many companies are also using these funds to buy back their own. Now buy backs for companies such as Apple, who have strong balance sheets (lots of cash, little debt) makes sense.  But many companies today, which are selling for 30X earnings, & have weak balance sheets, are borrowing to buy back their stock.

But what happens to these companies when the earnings start to decline? And remember that all this borrowing has been at historic low interest rates. Take a look at the following chart. Over the last 35 years rates have averaged over 6.5%. Even if rates ‘normalized’ to the 4% level, that would be 33 times the current 0.12 rate today.

Many of us remember the early 80’s when mortgage rates were close to 20%.

Fedfunds

In order to keep rates so low, the Fed bought massive amounts of US bonds. In July 2008, the Fed Balance Sheet totaled $890 billion, Today after buying up all of those bonds, the Fed Balance Sheet is now over $4.5 trillion.

Fed balance sheet

This massive accumulation of assets by the central bank is unprecedented. The Fed’s sole purpose in accumulating all those assets was to keep the interest rates low. In doing so, the Fed has squeezed out the middle class & seniors, those who relied on interest to increase as income.

Because they could not get any return on their money deposited in the bank, these folks had to move to riskier investments to get any yield. Pension funds & other institutional investors were also forced to find other means of yield.

Many investors seeking yield were lured to higher risk, high-yield bonds.

Stay clear of the High-Yield Corporate Bond market

Inn 2002, when the Fed under Alan Greenspan first introduced low rates, we ended up with the worst financial crisis since the Great Depression. Back in 2008, there was just over $1 trillion in bad mortgage debt in the markets & when that debt went bad, the global financial system collapsed.

Today, just in Emerging Market debt, there is over $9.5 trillion of potential bad debt. We also have over $2.2 trillion in high-yield (Junk) bonds, $1.2 trillion in student loans, & $1.05 trillion in sub par Auto loans.

We have published this chart from Mckinsey & Co. a few times, but it is worth another look. It shows the growth in debt from 2007 to today for Households, Corporations, Governments & Financial Institutions.

In this Musings, we want to focus on the Corporate portion of the debt. As we can see, since 2007, global corporations have increased their debt from $38 trillion to $56 trillion, an $18 trillion increase.

global debt

You would have thought that after the carnage from 2008, we would have learned. Albert Einstein defined insanity as “doing the same thing over & over again, expecting different results.” And that is exactly what has happened.

Wall St keeps packaging up bad debt & selling it to unsuspecting investors. Banks keep loaning Emerging Market companies  $ trillions. .Automobile companies gave out 7 year loans to anyone with a driver’s license.

With the Corporate bonds, there will soon be a rush to the exits & unfortunately many investors don’t even know they own them. Their broker or financial adviser got them into a high-yield mutual fund or Exchange Traded Fund, & the investor has no idea what’s in the fund.

Most investors holding these high yield mutual funds have no idea that these funds hold debt from very marginal companies, & many of those companies are oil fracking companies which are being bled dry with low oil prices.

Understand that mutual funds have loaded up on this high-risk Corporate debt & today they own 20% of ALL outstanding Corporate debt. When these debts start to go bad, investors holding these mutual funds will want to redeem their shares & this will cause panic, as everyone runs for the exits.

We have seen this story play out before & it always ends the same way. It is insane to be owning Junk Bonds today because unless you are the first to sell, you will find that there are no buyers, & then you will be looking at a 30%, 50%, even 70% haircut, just to get out of those bonds.

Looking at the 1 year chart of the JUNK ETF, it looks like it has already had a significant correction.

Junkshrt

But when you look at the bigger picture you can see how this sector has exploded higher on speculation from those ‘searching for yield’ investors.From trough to peak, this Junk ETF gained 154%. So yes, it has had a correction, but there is a long, long way to the bottom.

jnklong

Final warning!

In May 2007 we gave a final warning of a stock market bubble…

“We have locked in our profits on most of our equity positions, hopefully subscribers have followed our lead. We know that it is tough to SELL when everyone one is telling you to BUY, but our indicators are signalling this is the final warning to get out of equity stocks.”

In the crash that resulted from the 2008 financial crisis, most investors were crushed, as they had no idea of what was coming.

Similar to our 2007 warning on the stock market, today we are giving a final warning to get out of Corporate debt. Check your investments & make sure that you have no exposure to high-yield corporate debt.

In 2008 when the market tanked, we lost a number of investors. We couldn’t figure out why. To a person, the ones we were able to contact told us “We didn’t follow your advise, we didn’t sell.”

Please do not make the same mistake here.

George Santayana…”Those who do not learn from history are doomed to repeat it

Stay tuned!

love letter

9 year old writes a love letter & is now threatened with harassment charge

Do you think that maybe, just maybe, the degree of political correctness has now reached an absurd level? In Hillsborough County, a nine year old child has been threatened with sexual harassment charges for writing a love letter to his classmate. In the letter he described how his classmate’s eyes “sparkle like diamonds.” It also notes how the boy finds his crush “pretty,” and features a heart with the words “I like you” within it.

Administrators said that the notes are “unwanted,” and therefore could constitute “harassment”.

“My 9-year-old doesn’t even know what sexual harassment means,” the mother further noted, adding “He’s 9. What little kid doesn’t write love notes?”

<Read more–>

watchout

A chart you need to see!

As they say a picture is worth a thousands words. Below is a chart comparing the S&P 500 today to 2011. As we can see, today it is tracking 2011, almost in lock step. This suggests that the current pull back in the  S&P will extend further.

S&P2011vers2015

Jihadi John

Headlines – Nov 13/15

  • Wall St opens lower on weak retail data; Cisco drag. Read story
  • European stocks hammered after commodity rout.  Read story
  • Euro area growth misses estimates as ECB ponders more stimulus. Read story
  • Massive 3 billion barrel glut in Oil supplies to deepen price rout. Read story
  • VW brand sales fall 5.3% in first full month after scandal. Read story
  • Investors flee Toshiba as hopes fade for quick scandal closure. Read story
  • There’s a liquidity problem for the world’s biggest financial market. Read story
  • GM to sell Chinese built cars in US. Read story
  • Deputy head of Chinese securities regulator probed for graft. Read story
  • Mylan’s hostile bid for Perrigo fails. Read story
  • China doubles margin requirements to curb leverage. Read story
  • Half of Russia’s richest people are cashing out. Read story
  • What happens when a driverless car gets pulled over by the cops? Read story
  • Sweden checks for migrants in first border controls in 20 years. Read story
  • The Greece debt watch. Read story
  • US air strike may have killed ‘Jihadi John.’ Read story
  • Some of the people that hate US big banks the most, work in them. Read story
  • On the lighter side. Check it out
oil

Is this the bottom for Oil?

In our December 17, 2014 issue of Market Musings we stated that fundamentally, we would not see a significant rise in oil prices until we got a correction in the supply/demand ratio.

The latest data from the Energy Information Administration (EIA) shows that OPEC is now winning the market share war as US production is beginning to see significant declines. In April, US shale production peaked at 9.7 million barrels per day & has now fallen to 9.18 mb/day, a drop of over 500kb/day in less than 6 months.

While that is significant, we can see on the following chart that US production is still at the levels exceeding the 1985 high.

OilUSprod

As we have shown a number of times in these Market Musings articles & in issues of The Trend Letter, oil rig counts are continuing to fall dramatically, with last weeks Baker’s Hughes Rig Count down 4 rigs to 572. This is a dramatic drop off from the peak of about 1600 a year ago. .

Rig count

Another chart that we have shown a number of times is the Oil Cycle chart below. As the price of oil increased to over $100 per barrel, producers ramped up production, wanting to cash in on these great prices.

As production increased, so to did the supply. Historically, OPEC would cut back on production to maintain a profitable price for oil, but not this time.  This time it was the US producers who were pushing up the inventory & driving prices down, so the Saudis decided it was time for these US shale producers to feel some pain. Over the past year, we have seen an all-out game of chicken, where all producers kept pumping out record levels of oil.

But now the US shale producers have cut back on their new drilling, meaning supply levels should start to decline.

Oil cycle

Many companies are projecting capital spending  will be 30%-40% lower in 2016. We are reading lots of analysts who are calling this the bottom for oil prices…we beg to differ.

Technically, we are still looking for a drop below $40, & likely a drop to $32. Fundamentally, although US producers are cutting back on exploration, OPEC countries continue to keep the spigot wide open.

Countries like Iraq, Nigeria & Libya are planning to add more production by the end of 2015. And let’s not forget that if Iran is allowed to ship crude when sanctions are removed, this will further depress prices.

So while we are definitely getting closer to a bottom in oil prices, we have a bit of time before that happens. Certainly, there are growing tensions & threats of war,, which would cause oil to spike if these tensions take a turn for the worst.

Also, while US production has been declining, that decline has been slowing. There are still too many speculating that oil will shoot right back to $100. We need to see more pain in this industry & more companies fail, to really get the production down.

The only cure for low prices in oil is low prices. Further cuts & shutdowns are needed before we will see prices rise in earnest.

Oil recently broke down out of its triangle wedge pattern…a bearish sign. For now the trend is down, & we never argue with the trend.

oil price

In yesterday’s Musings we reiterated our long US dollar forecast & with the US dollar breakout combined with excess production by OPEC & US production declines slowing, we remain bearish for oil at this time. As noted previously, our projection is for the final leg down to see oil prices to the low $30’s, likely before year-end.

If we get a steep decline soon, we may send out some BUY alerts to subscribers, as tax-loss selling may offer some nice bargains.

Stay tuned!