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Crude Awakening
- 1. Crude Awakening 28 January 2016 War Room
- 2. HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck Product UpdatesScenario Updates
- 3. Market Update Oil Redux Scenario Update: Crude Awakening Crude Awakening
- 5. Market Update sources: HiddenLevers, Forbes, Zerohedge, Guardian, Atlantic, Wikipedia 1 Zimbabwe China Colony 2 3 Obamacare worries mount Finance Industry in Limelight
- 6. Market Update: Fed Mea Culpa 4 sources: HiddenLevers, WSJ, Marketwatch March rate hike off the table 2015 Fed Stress Tests dead wrong on oil Foreign QE ECB + China too early or too late? Still no 2016 Fed Stress Tests
- 7. Market Update: January Correction in Context sources: Yardeni Research Year S+P Return % Recession ? 1948/49 -59 Y 1957 -21 Y 1962 -26 N 1966 -22 N 1968/70 -36 Y 1973/74 -48 Y 1976/78 -19 N 1980/82 -27 Y 1987 -34 N 1990 -20 Y 1998 -19 N 2000/02 -49 Y 2007/09 -56 Y 2011 -19 N Aside from 1987 crash, all 30%+ corrections were part of a recession. Even if current 12% drop doubled, recession not guaranteed. 5
- 9. Oil Redux: Phases of the Crash sources: CBC Phase 1 •US Dollar rise •No risk premium Phase 2 •Saudis pumping •Everyone pumping •China Slowing Phase 3 •Iranian oil back •US demand flat •Tech advances
- 10. Oil Redux: Max Draw Down Comparisons sources: HiddenLevers Current Oil correction is in line with 1980 and 2008 crashes. -76% -71% -70% -55% -55%
- 11. Oil Redux: Supply / Demand Balance sources: HiddenLevers, OilPrice.com Demand Factors: • Global growth slowdown • US demand stagnant / dwindling • Electric Vehicles • US Demographic Shift Supply Factors: • US producers hedged into 2017 • Iran production ramp-up • Saudi / OPEC still not cutting?
- 12. Oil Redux: Equity / Oil Correlation sources: HiddenLevers Year Oil Loss % S+P Return % 1985/86 -59 +22 1987/88 -35 -10 1990 -27 +5 1990/91 -45 +23 1997/98 -55 +54 2000/01 -53 -21 2003 -31 +11 2004 -34 +5 2006/07 -35 +12 2008 -76 -29 2010 -21 -9 2011 -32 -15 2012 -29 -2 2014/16 -70 +3 14 OIL corrections Six S&P 500 declines • Recessions knock down both oil + equities • Mid-cycle oil crashes have little impact
- 13. Oil Redux: Energy Sector Impact source: HiddenLevers Upstream: Need for cash = pumping all-out Many firms will pump into the teens (eg FCX @ $16/barrel cash cost) Many firms’ shares down 90% Downstream: Refiners’ profits up on cheap oil Retailers’ profits up on cheap gas Refiner ETF has ½ downside of S&P Midstream: MLPs hit by lack of future growth Many MLPs are overleveraged MLP ETFs down 50% -90% -50% +5%
- 14. Oil Redux: US Economic Impact source: HiddenLevers, Resource Reports, WSJ Cheaper oil = HIGHER GDP Cheaper oil = DEFLATION Cheaper oil = NO IMPACT ON CORE INFLATION Cheaper oil = MORE PEOPLE EMPLOYED Cheaper oil = PAYROLLS INCREASE Cheaper oil = MORE SPENDING
- 15. Oil Redux: Global Economic Impact source: HiddenLevers, Resource Reports, Bloomberg GDP pop from cheap Oil: • India + China • Japan + S. Korea • Eastern Europe • SE Asia ex Malaysia Sovereign Default Risk: • Russia Resource Countries Benefit too: • Canada • Brazil • Chile
- 16. Oil Redux: Investment Posture Opportunities Hedges Airlines Shipping + Transport Lodging Refiners Non-energy in Resource Countries Solar Non-energy High Yield sources: HiddenLevers Utilities Energy Importing Countries (Japan, India) Refiners Don’t believe the hype!
- 18. Scenario Update – Many in Play
- 19. Oil Crash Good Bounce Back Bad Isolated Crash Ugly Perfect Storm $32 -33% $48 PRICED IN $74 +50% key lever OPEC relents or Shale producers fold. Almost 60% decline in oil since summer 2014, S&P has been flat. Oil prices pierce financial crisis lows. Unlike 2008-09, no V-Shaped recovery for Oil. Jan 2015 WAR ROOM
- 20. BAD: Shanghai Crash foreign money no come back China markets struggle but S+P in tact source: HiddenLevers, WikInvest, Forbes, CNBC, WSJ negative wealth effect RE + credit bubbles don’t pop 69 P/E, above 2007 peak Still holding! margin calls actually happen -4 -32 July 2015 WAR ROOM
- 21. UGLY: China Recession triple bubble pop source: HiddenLevers, Economist, ZeroHedge, seismic economic changes China posts negative GDP as a consumer nation govt actions far exceed US in 2008 China is world’s #2 consumer government caught lying drags down commodities producers July 2015 WAR ROOM
- 22. BAD: Tech Reality Check some unicorns die Nasdaq stops outpacing S+P source: HiddenLevers SF property market correction normalizing P/E ratios 1y return SPX +12 Nasdaq +23 May 2015 WAR ROOM
- 23. UGLY: Dot Com Déjà Vu more muted than 2000 crash source: HiddenLevers valuations questioned across tech Fed may restart QE Unicorns crashing spooks Nasdaq SPX less damaged, a la 2000 AAPL GOOG take a hit May 2015 WAR ROOM
- 24. Crude Awakening: Three Big Risks Progress 58% S&P -10% Progress 43% S&P -12% Progress 39% Energy sector bankruptcies will rise as oil hedges roll off. Low commodities prices are tied to weak global growth, but US likely avoids recession. Unicorn are being revalued 50-75% lower now, and tech IPOs are mostly on hold. Further downside possible if tech growth story weakens (AAPL, other FANGS) China appears more likely to slip into first recession in 30 years, with a devastating impact on its suppliers. US impact muted, but could result in mild bear market Commodities Perfect Storm Dot Com Deja Vu China Recession S&P -16%
- 25. Crude Awakening – Take Aways Russia is primary default risk on Cheap Oil China more downside impact on US than cheap oil Cheap Oil = net benefit (to most countries) OPEC action needed to lift Oil Prices