Iran + Avg Crude Prices: Will Global Growth Suffer?

While doing some analysis of the global and the american (US) crude oil market I got to the chart below.

What is interesting about this?

Below you will find the weekly Brent Crude 1st future price and its 52-week moving average (so average price for the year-ago).

The YoY changes go as indicated:

• 2007:  +11%

• 2008:  +33%

• 2009:  -35%

• 2010:  +28%

• 2011:  +38%

Some will argue that US is a WTI-based crude price, etc, but that's simply the Cushing/OK delivery point price. Physical crude prices around the US are actually closer to Brent as there is a technicality regarding regional supply/demand at the NYMEX crude delivery point.

Anyway. I didn't do any studies on this. I just wanted to point to the ladies that the past year experienced the highest average crude prices ever.

Now check out the AAA US Average Gasoline price chart, same smoothing thingie:

Dillema:

What are the odds of a US-fueled strike on Iran? There's no way that Israel would make this decision alone considering the crazy days we live in.

Game theory time:
- If energy prices go even higher due to supply disruption in the Middle East and more risk premium is added to the pricing curves...
- higher industrial and personal costs of energy will affect corporate profits / disposable incomes...
- that will affect final sales...
- that will impact global growth expectations...
- that will likely cause a negative loop into financial markets...
- erasing some good amount of global wealth...
- that should impact confidence...
- with already such low global aggregage growth momentum...
- and monetary policy that doesn't pass through to economic activity in delevering economies...
- for governments that are already knee-deep into fiscal problems.

So... Iran is gearing up nuclear weapons or so say the Israeli.

We're in the beginning of the 21st century. We live in a globalized world. Many countries depend on global oil exports. Iran can't support itself without selling lots and lots of crude oil at decently high prices. It must import a lot of what it eats, not to mention other things it consumes. Today some 500kbd of oil @ 100 bucks (it's closer to USD110/bbl) = USD 50mln/day = 1.5bln/month. Iran exports over 2.5mbd... so USD 7.5bln/month in receipts. What a number.

Now what is inside an iranian leader's head: "I am building a weapon of mass destruction. If I use it oil prices will explode, but my country will be swiftly taken over by global military and I will lose power and go to jail or die" or "if I attack there will be political and economic sanctions to my country and my petrodollars will be worthless while my neighbors will still get all the revenue from much, much higher oil prices and could attack me later on when I am weaker, without supplies and while my people starve and kick me out of power". I don't think religion trumps hunger. Not a chance. And I don't think a leader wants to fight a war he can't win.

So what is inside an iranian leader's mind? I'd guess "let's move on with nuclear project to keep this risk premium high enough so we can (a) team up with someone who takes no sides, at least temporarily [China+India?], but needs oil and (b) sell lots and lots of oil at high prices (c) and later let them check our installations, take our weapons away at a reasonable price" or something.

Obviously you can see I understand nothing about Israel x Iran. That is certainly true. I can notice the grudges. I can listen to arguments from both sides. But deep inside my heart I will never really u-n-d-e-r-s-t-a-n-d this grudge. It seems illogical to me. It dwells into ideology, faith and memories of a distant past that most now alive didn't even live through. This grudge speaks nothing about well-being and plain happiness. It seems to me it is more on ego. But who am I to judge. Smarter more experienced people think otherwise, I guess.

Now what can OECD / US / etc politicians have in mind if they organize an attack on Iran?
(A) Even if they hurt us with missiles and other warfare [considering there's no ready-to-shoot nuke] we will get them really quick through economic, political and military assault.
(A.1) Economic: the iranian population would revolt against the regime which would lose popularity after their people starve, etc. Energy-assets would be western again and there'd be much more peace in the foreseable future after the demage is repaired in 5-10 years. Oil risk-premium would collapse and average crude oil prices should come down considerably boosting global growth and easing the fiscal situation of countries like Japan and the US.
(A.2) Political: I'm not good at commenting about politics.
(A.3) Military: the country would be devastated swiftly in order to contain high crude prices and restore calmness in the Persian Gulf.
(B) Crude oil prices would explode upwards and would cause severe strains in an already-tough global economic environment, then collapsing after the war is controlled, demand weakens and supply is restored at least partially.

(B.1) Recession again.

Food for thoughts.... bed time. I only have time late at night now to write as during day time the focus has become more micro.

Interesting fact: US crude oil demand is down now sequentially since 2008 while their production is reaching new highs (not to mention their natural gas production too, new highs, while, without storage capacity or instant ways to export it, it makes new lows every year).

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

US GDP: Do you recognize a pattern?

So US GDP data was out last Friday. Slightly slower than expected at +2.8% QoQ annualized rate vs +3.0% expected.

What about it?

Inventories represented around +1.9% of this number while "Real final sales (GDP less inventory changes) expanded at an anemic 0.8% annual pace in the fourth quarter, a sharp slowdown from the third quarter’s healthy 3.2% rate. That paints a different picture from the apparent pick-up in headline GDP growth from the third-quarter’s 1.8% yearly rate. The difference reflects the shift to inventory building in the fourth quarter from a drawdown in the third quarter.” (Barron’s)

Now check out the interesting pattern since 2009... 1Qs numbers as the lowest in the years and the increase towards 4Qs highs.

The loss in growth momentum is evident.
Now consider many years of gigantic fiscal and monetary stimulus.
How healthy is the underlying situation?

The clash of titans this year in the macro landscape is DM austerity x EM monetary easing.

Who will win with crude oil averaging very high levels?

Posting from iPad for the first time.. through an App designed for the iPhone... Google really is focusing on expanding Android's base.

Will I ever learn? + Iran x Israel

Ladies, bear with me if I sound confusing or don't spit out detailed info, but I've been working like a dog studying new things, new ways that I can try to make money. It's 1h51am and bed is calling. A quickly-written post:

So today Ben BearManQE let the horses out. Again.
And the market rallied some good 10+points.
Crude Oil rallied.
Metals exploded.


Some very interesting weekly charts are the SPX Index, breaking to the upside..
And the CRB Commodities Index (CRY Index on Bloomberg), doing the same.

So what is going on? I thought it'd be a good idea to short the SPX through futures @ 1307 [ESH2] considering some factors:
- It's failure to break this downtrendline on the weekly charts... twice.
Then came another day...
- It's failure to sustain the upward movement it made yesterday during after-hours due to Apple's incredible result
- And today we got the Fed selling puts that increase in maturity as time goes by.

As I mentioned before.. No love for this position. Just trying to trade in-and-out a bit instead of leaving a static bear portfolio overall.
Some ideas that spring to mind now are: shorting Brent or WTI crude time-spreads, but the NYT isn't helping me much.
There crude oil curves are awash in middle-eastern risk premium and I've mentioned before that I like to collect these when they're available, "laying around". It was the case with missing the Italian 6m CDS short @ 412bps bid (or same tenor Argentine ~ 800bp! Much better debt structure than Italy, but runaway inflation and insane politicians). Now, in crude-space, we're watching supply glut from a rise in production in the US (Hail there, North Dakotans!), refinery shutdowns due to backruptcy and maintenance and, despite high product margins in certain areas, the oncoming slowdown in activity and extreme austerity could prove some weakness in demand. Did I mention that crude is hovering 100 USD/bbl WTI + 10USD/bbl to reach Brent's price? What a hit to activity and no one has been talking about this. OTM high-strike calls are more expensive than opposite site puts... so what should we do?

Piece of the piece:

As we spoke, however, Barak laid out three categories of questions, which he characterized as “Israel’s ability to act,” “international legitimacy” and “necessity,” all of which require affirmative responses before a decision is made to attack:

1. Does Israel have the ability to cause severe damage to Iran’s nuclear sites and bring about a major delay in the Iranian nuclear project? And can the military and the Israeli people withstand the inevitable counterattack?

2. Does Israel have overt or tacit support, particularly from America, for carrying out an attack?

3. Have all other possibilities for the containment of Iran’s nuclear threat been exhausted, bringing Israel to the point of last resort? If so, is this the last opportunity for an attack?

For the first time since the Iranian nuclear threat emerged in the mid-1990s, at least some of Israel’s most powerful leaders believe that the response to all of these questions is yes.

(...) and it goes on....

A nuclear Iran announces that an attack on Hezbollah is tantamount to an attack on Iran. We would not necessarily give up on it, but it would definitely restrict our range of operations.”

At that point Barak leaned forward and said with the utmost solemnity: “And if a nuclear Iran covets and occupies some gulf state, who will liberate it? The bottom line is that we must deal with the problem now.”

He warned that no more than one year remains to stop Iran from obtaining nuclear weaponry. This is because it is close to entering its “immunity zone” — a term coined by Barak that refers to the point when Iran’s accumulated know-how, raw materials, experience and equipment (as well as the distribution of materials among its underground facilities) — will be such that an attack could not derail the nuclear project. Israel estimates that Iran’s nuclear program is about nine months away from being able to withstand an Israeli attack; America, with its superior firepower, has a time frame of 15 months. In either case, they are presented with a very narrow window of opportunity. One very senior Israeli security source told me: “The Americans tell us there is time, and we tell them that they only have about six to nine months more than we do and that therefore the sanctions have to be brought to a culmination now, in order to exhaust that track.”

I am thinking about selling ATM calls (shorter tenor, higher theta) to fund multiples OTM calls or call-spreads while shorting time-spreads. If Israel strikes Iran I expect at least +20 USD/bbl in a matter of days. Lybia produces not even half (got to check later this) of what Iran does... and Perhaps Lybia/Lebanon could join Iran fighting back.. so... A parabolic move, very fast, could go so fast that the loss from the short-ATM-call would be dwarfed by the multiple-calls longs.
Got to check the math.

In the mean time I believe the bearish portfolio would perform well if war hits the fan.
Food for thoughts. Again, interesting times.

Bernanke... I have a hard time learning that markets go up when you let the money spigot on.
But I am more humble not to add to a losing position and am thankful for levitating prices in other securities so I can try to short them some day, 2015 or so.

Cheers,
The Tail Chaser

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

A few updates

So it has been a long, long, long time since I have written much around here.
Let's say I am back, likely not posting as often as I used to, but I'll try to keep things running around here. Very unlikely that I will post content from others frequently as that takes up a lot of time.

From now on prepare yourself to read a bit more about commodities, especially energy and agriculture, being some of it towards the micro-side of things.

So... updates? What has happened to the portfolio since the last update in September?

I had closed the BRL DI Futures July 12 receiver on December 2nd of last year @ 10.07%, 300% of NAV.
That means a (10.89% - 10.07%) = 82bps * ~3 gain, minus negative carry, loss of duration as time went by and exposure of the profit/loss generated by fluctuations in the USDBRL. The trade added +1.47% to the NAV of the day the trade was put on.

The driver behind this exit was that a lot had been priced into the curve by the market, the financial markets had rallied a lot and the loss of duration just made the risk-reward worse by the day. I could have increased the duration, but at the time it made sense to stand still and look around with less risk in the books. The portfolio was 'bear enough'.

The EURBRL short posted earlier was also closed last week.
Entry @ 2.3912 spot-ref. Exit @ 2.2764 spot-ref. Directional gain of +4.80%. Adding carry [125 days, around 2.15bp/day] and the fact that the PnL of the trade generated exposure to the USDBRL the trade performed well at a total of +7.36%. Size was 20% of NAV when entering the trade, so the trade added +1.465% to that date's NAV.
The risk-reward of this trade was tough while riding it. The first few days were absolutely horrible, warranting even a "Should I stop out?", but looking from higher grounds the portfolio as a whole performed very well in times of extreme stress. So it was a way to add some carry to the portfolio while adding what I consider to be a more positive tune to it, while adding some "risk-on" touch to it.

Do I believe that this trade has more to go? Long-term yes, due to secular fundamentals of Europe x Brazil. But  short-term perhaps. I think there is a clear support @ 2.18 and the risk-reward here gets a bit worse in my opinion.

Now a bit of cheap-talk.
 
The risk-off tune of the market has decreased remarkably due to, in my humble opinion, the gigantic 3-year LTRO (EUR~500bln) done by the ECB in December together with rate cuts and the ongoing implementation of the sovereign bond buying program. These go a loooong way into demonstrating that the ECB is no longer such solid warrior against inflation and is, it was about time!, joining politicians that want to save the euro zone and the european financial system / economy. They're not worried about moral hazard, not worried about newspaper headlines stating that the ECB is giving money to banks and helping capitalism desintegrate. They're engaged in avoiding a catastrophe.

This helped investors bid in sovereign bond auctions. THAT is critical for a function european financial system. Also key for confidence. It was key for the recovery seen in global risk markets. And what a recovery it was.

So it brings me to the other update which was a short on the S&P futures @ 1307 (ESH2, 25% of NAV).
Why?

Because I think the correction was already brutal and I see way too many people already celebrating the start of a new bull market. People patting themselves on the back saying that the US won't fall back into recession, etc. This is now consensus. Herd behavior. When these words go together I've got to act.
What were the positives? What will make some positive impact in global growth?
- ECB's LTRO + SMP + rate cuts acting as QE/monetary easing/provider of liquidity
- Some better-than-expected economic data coming out of the US
- Major easing globally from large countries such as Brazil, China, Australia, etc.
- Short squeeze and risk under-allocation.

This is a more tactical trade and there's no love in it. Short-term horizon for pain here.
I need to do some reading on matters 'global activity'.


I will need more time to elaborate on the negatives, but it is time for bed now.
Quick note: I do regret not shorting the damn Italian 6m CDS @ 412 bid back when the markets priced a global collapse in September. Shoot first. Ask questions later. And also the CDS from Argentina. These exploded also, while the debt profile of the country isn't horrendous.

Open positions: *sizes relative to NAV when trades were entered
+200% of NAV in Dec16 Germany CDS
-25% ESH2
+100% May14 USDCNY Call 6.80
+100% Mar14 JPY Swaption Payer 4.00%
+15% XAUXAG

I am thinking about switching the Dec16 CDS into a 10y tenor. Better upside x carry and smaller spread-roll-down too. I would couple this with a 1/5 size in short EURBRL.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

2 New Trades: One out, one in.

Two trades yesterday. I'll post about the drivers and the return of one of them, which was closing a position, tomorrow or Sunday.

Closing entire short in EURBRL here.
Opening a short ESH2 @ 1307, 25% of NAV.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com