Oil is in the headlines again as both West Texas and Brent crude have been consistently over $100 for a while now.  Of course this isn’t the whole story as we are also in an election year.  The price at the pump matters more than normal around elections as voters like to blame or praise whoever is in power for any and everything that is going on.

This is a good time for a disclaimer-Some people might call me right of the right wing when it comes to personal views and voting.  When it comes to trading politics absolutely need to be put aside.  I take a pragmatic view of things and never confuse politics with policy.

Getting back to oil we keep hearing that when Obama came into office prices at the pump were so low.  Well that is a half truth.  As you can see in the chart below the price of Crude is in fact higher than when Obama took office.(Click on chart to enlarge)

What we never see however is what oil was doing before Obama took office.  If we pull up a 10-Year of crude we can see that not only was oil at its cycle lows when Obama came in but it had just dropped from its all time high of $150 a barrel.  Oh and do you remember why oil dropped like a rock?  There is a thing called demand destruction.  It tends to happen when the globe loses about a third of its wealth inside of a year.  Since then we have had a recovery, even if it has not been as robust as we would like, the central banks of the world have pumped in trillions of dollars into the global economy, the Middle East has been in its “Arab Spring” for over a year, and we still have no long term energy policy.(Click on chart to enlarge)

No energy policy?  Hah Obama must be doing this to us.  If he had that much power then unemployment would be at zero.  Fortunately the President while the most powerful man in the world is not that powerful.  Until the office of the Presidency includes some grand wizard of alchemy he, no matter which party he is in, will have that power.  Obama is responsible for higher prices only to the extent that he like his predecessors have failed to formulate any type of long term energy policy.  Just like the developed worlds central banks and their debt can, we keep kicking the energy can down the road as well.  T Boone Pickens is not lying when he says that every President since Nixon has declared that we will be energy independent and then has proceeded to do nothing.

So while there are definitely several shorter term issues driving oil such as the problems in Iran and current supply issues to both coasts, the biggest issue is that long term supply is not as strong as we once thought it to be.  Most of the world has always thought that Saudi Arabia would always be able to boost production in times of crisis.  Well as we saw when Libya had their revolution Saudi Arabia either does not have, or just doesn’t want to use, any spare supply.  That fear coupled with more immediate issues is what is keeping oil above $100 and what will likely keep it above $80 for a long time if not forever.  What’s that you say?  Saudi Arabia can never run out of oil you say?  In the chart below we present Middle East oil as a percentage of total global production.  As you can see their share of production has not moved since the late-eighties.(Click on chart to enlarge)

What about the rest of the world?  Brazil and Russia have a lot of oil don’t they?  Well to certain extent they do but that does not mean they have enough to supply the world or to make up for missing supply in times of war or crisis.  Here is a chart of global oil production along with the average annual price of crude oil.  As you can see during the entire rise in price, production levels were not able to rise to keep prices in line, or to further enrich whatever country has this huge hidden supply of oil the world seems to be banking on.(Click on chart to enlarge)

Getting back to the United States can’t we just drill our way out of this mess?  If we got rid of Obama we could drill everywhere and then we would have all the oil we would ever need.  As much as some pundits would want you to believe that the truth is that our oil production peaked back in 1970.  If in 40 years we have not been able to find enough oil to keep up with our demand then good luck finding all of this supposed oil today.  Yes, there is untapped oil but do you really think that it will be enough?  Peak oil people could be wrong and we could find Ghawar 2.0 in your backyard?(Click on chart to enlarge)

Oh but what about offshore production?  Can’t we just go drill of the coast of California?  They have already tried that and while they definitely did find some oil and some is not currently being pumped there was nothing to lead  oil experts to think that there were any mega-wells out there.  While on the subject what was happening to offshore oil drilling before the BP spill? Yes, as you can see in the chart below even before the spill oil production was dropping like its hot for almost five years.  Not only that but that is coming off levels not surpasses since 1995, an entire 15 years earlier.(Click on chart to enlarge)

So while Solyndra is obviously not the solution to anything, except how to lose taxpayer money, the President can not just wave a wand and have oil start seeping from the ground.  Global peak oil is as real as United States peak oil.  We are not working towards a long term solution which means that every time anything happens in the Middle East, Russia, or even Brazil the price of oil will rise.  Because of global energy uncertainty oil probably has a long term floor in the $80 area.

What can we do to change this?  Well some items that would fit into an energy policy would be natural gas, rail, solar, etc. But until we admit that oil doesn’t grow on trees we will continue to revisit the spot where we now stand and it will happen more often and probably with more force each time.  In our work and model portfolio we have a bias towards being long of energy as the long term risk reward is definitely slanted to the upside.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Disclaimer-In our model portfolio we are long OIL, XOP, and short some refiners.

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By and large investors as a group are complete data junkies.  Over the years I have collected more data sets then I can count.  The idea of course is that the better and more complete data set you have for anything the better your investment decisions will be.  While results can obviously vary the basic idea holds true that you want, and really need, good accurate data.  Well over the past 30+ years data has been digitized as we have all moved to computers.  Luckily you do not need to use a spreadsheet which is nothing more than a paper with rectangle grids.  No, now we can, or at least should be able to download some data, put it in a spreadsheet, and easily manipulate it to hopefully find info that helps lead you to an idea.

Obviously data from “for profit” entities such as stock exchanges, investment banks, research firms, etc. can cost money and in most instances should.  When it comes to government data it should and for the most part is free.   Sadly however different agencies handle data drastically different.  We have the rockstars over at the St Louis Federal Reserve that run the phenomenal FRED service.  Honestly it is one of the best things to ever happen to the internet.  You can pull regular interest rate data from any data vendor but FRED takes it to a whole new level of data sets and usability.  Sick of going to the website?  Fine they have a great Excel plug-in that downloads and charts data like a champ.  Need data on population, Employment, & Labor Markets?  Well if you do FRED gives you 2,234 different data sets and since they are so awesome they are adding new data at least every few weeks.  Want to know how much soap, lubricants, waxes, polishing or scouring products; candles, and pastes we export?  Just type in “ID34″ and FRED will serve it up for you.  Yes, their data collecting goes all over the place.  So while FRED is not a Bloomberg it does an excellent job as does not cost a thing let alone 2k a month.

A lot of the data on FRED is collected by other agencies but lucky for us they have an understanding that allows them to provide it to us on the best data platform available in the entire United States government.  But guess what? Some government agencies have data on their sites that for whatever reason is not on the FRED system.  This of course is not necessarily a huge issue as you can just go to their site and get the data….right?  Well while technically true some sites suck.  Suck is actually too nice of a word but we are usually a PG site and never go past PG13, no string of F bombs at The Macro Trader.  What site is frustrating The Macro Trader right now?  If you have spent more than six seconds at Treasury.Gov you probably also contemplated throwing a monitor through a wall.  Possibly the hardest site to navigate on the entire freaking internet you almost start to wonder if they are trying to hide data.    It’s like they are living in 1999 on the AOL internet it is so bad.

It was not too long ago that they did not even provide data in an XLS or CSV spreadsheet compatible format.  Yes, we can download a TXT file and then import it into a Excel but come on this is 2012 not 1912.  Anyways once you are able to finally find the data you are looking for, and it can be a chore, you download it and then open it.  You then have to go through and copy, transpose, paste, and repeat while you make it into a usable format.  While having series of data presented horizontally works great when you are reading a release, it is a miserable thing when you are working with data.  It gets worse however when you then need to take each year out in order to connect multiple years, or depending upon the data pull out individual country data, put in in another sheet and then look up the country code so that you even know what you are looking at.

If all this sounds confusing then don’t ever go to the Treasury website.  There may be a treasure trove of information in TIC data but most people do not have the time to find it with the current mess that is the Treasury website.  What do I wish?  I wish that either all government data went to the FRED site or that every agency had to use the same data delivery program that they have built.  They are all supposed to be on the same team and it would make the data that they provide usable.

I could go on all day about some other data travesties, namely major cuts at the EIA a year ago but Gregor already covered that well.  The short version is that in an attempt to save some money the government cut funding for the agency that collects data info so that our government can make good policy decisions.  Consequently the EIA had to cut some of the data series and other parts of their program.  Of course most politicians don’t even care as they don’t want facts to get in the way of their agenda.

We here at The Macro Trader would love it if all of our fellow data junkies would call their elected representatives regarding the EIA and call the Treasury to express your disdain.  Most likely nothing will happen but we long for the days when TIC data doesn’t take a gazillion years to wade through and come up with anything useful.  We long for the days when energy data was plentiful.  For now we will of course get by but if you want productivity in the financial sector to go up a few percent give us data in an efficient manner.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

P.S. If you are a subscriber and send us an e-mail we will send you cleaned up versions of many data sets.

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If you have not yet taken a trial and subscribed, here is our basic publishing schedule. Each Monday evening we send out our weekly letter.  Typically 20-30 pages it is chock full of commentary as well as a section devoted to proprietary and not so proprietary indicators that we find useful for different asset classes.  Monday, Wednesday, Thursday, and Friday mornings you will be receiving a 3-10 page daily letter with any model portfolio changes, items of interest, and interesting links.

In addition to the daily newsletter we have also added individual stock selection on both the long and short side to our model portfolio.  While we usually try and express our ideas via ETF/ETN’s the truth is that many times some individual names can do a lot better job.  Consequently we now include  ETF/ETN’s, options, and individual equities in our model portfolio.

As we all know there is no free lunch and consequently our rates will be headed higher.  For the next few days we will leave the $1 trials set at 4-Weeks and then will change them to 2-Week as you will get a solid feel for how we look at things with the greater publishing frequency.  When will rates go up?  Well to add a sense of urgency to this message, marketing experts say this is important, we will leave pricing alone for the next 100 subscribers after which it will go up.

Right now you can get a full year for $395, get a quarterly subscription for $124.95, or get a monthly subscription for $49.95 a month.  After we raise rates our yearly subscription will go to $595, quarterly to $174.95, and monthly to $74.95.  To take The Macro Trader for a spin just click HERE and choose your subscription option.  Everybody that is currently subscribed as well as the next 100 subscribers will of course be grandfathered in and continue with their subscription as is.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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-European leaders to realize that this is more than a liquidity problem.  Alternatively for European leaders to lead instead of the ridiculous statements that have been coming out of that continent for over  year now.

-Democrats and Republicans to find some competence.  Currently they seem to be trying to make stupid seem smart.  We realize that this is a tall order for Santa but if we got this present we would be content for years.

-Correlations to drop.  This past year everything has been trading with a correlation of either 1 or -1, neither of which is conducive to directional trading.  We like buying good industry groups, shorting bad ones, buying certain commodities, and selling others.  This past year has had us either buying “risk” assets or buying USD and Treasuries.  Santa please fix it as this is getting old.

-For the hyper inflationistas to STFU.  Yeah we said it.  I am completely sick of people like Peter Schiff coming on my TV and radio to tell me that hyper inflation is hiding right around the corner.  You have been yelling for four years and so far we have had mild inflation at best.  Please Santa if you would like to shut these people up it would be a great Christmas and New Year.

-Teach financial writers how to write headlines.  ”Market is down .01% on housing numbers.”  If the market barely moved then why do you have to apply a reason for it?  Just say that the market is up x% today and then list off what happened that day.  We don’t need a made up reason that only annoys us.

-An Energy Policy.  We realize that this present is as hard to deliver.  After all since WW2 every single president has said that we will be energy independent in X amount of years and yet after they are in office they do nothing, absolutely nothing.  Even though we realize that this present can’t fit under the tree it would be amazing to finally get it.

That’s it.  We already have our Red Ryder BB gun, our Radio Flyer wagon, a snuggy, etc.  This Christmas we would love for some of these problems to at least be addressed if not solved.  World Peace would also be awesome but we would be more than happy to settle for any and/or all of the above.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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Shanghai Index

 One of many indicators pointing to more troubles ahead, the port data out of LA and Long Beach is showing that trade has been slowing down for some time.  Usually traffic peaks in August-October but this year we hit a high in May that we were not able to break.

LA and Long Beach Port Traffic

The bottom line is that Europe may be getting all of the headlines but China has been slowing, is still slowing, and looks as if it will continue to slow.  With Europe and China basically in recession how much longer can the United States hold out?

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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Citi Economic Surprise Index USD and G-10

Not only are economic numbers expected to turn lower but we are also seeing several signs that inflation is dropping.  One relationship that we follow closely is that of the CRB Raw Industrials Index against the SP500.  As you can see in the chart below the two are usually very correlated.  When the industrials are moving higher stocks usually follow and when they turn down stocks tend to do the same.  Right now there is a disconnect, one that we expect to be resolved with the SP500 moving lower.

CRB Raw Industrials Index and SP500

This relationship matters because if inflation moves lower the stock market will as well.  We can see this very clearly in the next chart where we have overlaid the weekly SP500 with the 10-Yr TIPS breakeven rate.  As you can see these have a very tight relationship.  What you can’t see is that this relationship goes back long before the crisis.  When inflation expectations rise the stock market rises and when they fall the market falls.

SP500 and 10-Yr Breakeven Rate

Other signs that inflation is not upon are that government bond yields are hovering around historic lows.  As you can see in the next chart the 2-Year Treasury yield has been low and headed lower.  Despite all the hype regarding hyperinflation we have not seen any of it, and based upon the messages from the bond market we are not seeing it anytime soon.  In case you are wondering we are seeing the same thing farther out on the curve with 10 and 30 year yields also near their lows.

2-Yr US Treasury Yield

Another sign that we have been following is this chart of the Shanghai composite and the CRB index.  As you can see the two indexes peaked within two weeks of each other and have been steadily working their way lower for the past eight months.  As the nation of commodity stockpiling has slowed down so have their stockpiles.  As this huge underlying commodity bid has vanished it has allowed industrial commodities to drop.

Shanghai Composite and CRB Index

Whether it becomes an all out crash, ala 2008, or not is not known but we are confident that the global slowdown will continue.  So what have we done with this view?  In our model portfolio we are short the AUD/USD as we expect the Australian Dollar to move lower as commodity prices and Asian demand continues to falter.  We are short the EUR/USD via options in a trade we placed back in August.  Recently we bought the USD/CHF as we expect the Swiss Franc to weaken considerably from here.  We are also short the SP500 via options and long the Lehman/Barclays Aggregate index which is highly weighted with US Treasuries and investment grade credits.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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Shanghai Stock Exchange and SP500

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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One tool that we have found useful in looking out towards the future is that of the ECRI Weekly Leading Index.  While by no means a holy grail it has historically done a fairly good job at forecasting stock market returns.  As you can see in the chart below it has been very accurate over the past few years as it has led the SP500 by several months at important turning points.  (Click on chart to enlarge)

SP500 Year Over Year % Change and ECRI WLI Growth Rate

So what is the WLI saying right now?  Going along with our long held deflation thesis the WLI is now pointing towards slower growth in both the economy and particularly in the so-called “risk markets”.  This of course matches what we are seeing in several other indicators and relationships that we follow.  We have covered a few indicators in previous posts such as how junk spreads point to higher unemployment claims and how the PMI is pointing towards slower growth.  In addition to these we are seeing many other signs such as the drop in commodities, take a look at the CRB Raw Materials Index, and in the rise of the US Dollar.  Of course none of these are holy grails, just signposts in the fog.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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August is another cruel month for hedge funds-(Reuters) – Most hedge funds lost money again in August as hundreds of managers, including some of the industry’s best-known names, stumbled when stock markets swooned anew.

-and then we laughed.

Hedge Funds are no more an asset class than mutual funds are.  There are several “general” classes of funds investing in anything from stocks to bonds to art.  Long, short, long and short, arbitrage, levered, etc.  There are a gazillion different strategies that are employed so headlines like the above are not helpful for much more then a useless sound bite.  But onto the part that we actually liked.

One line mentioned how Global Macro was up 2.16% for the month of August which would indicate something less then cruelty for hedge funds, including some of the industry’s best-known names, but hey that’s just us.  Anyways how is Global Macro actually doing?  Well depending upon which macro index you use the numbers will be a bit different but for the most part this specific corner of the market is flat give or take a percent or so.  While we, we being our newsletter The Macro Trader, do not try and hug our benchmark it would appear as though this year we have.  In the table and chart below we show how our newsletter had done against the HFRXM and SP500 indexes.  The table has the raw numbers and the chart has the performance of $1,000 year to date. (Click on charts and tables to enlarge)

Performance

$1,000 Invested Year To Date

How do we explain our relatively high correlation to the HFRXM Macro Index?  Well we think that the next chart probably does a good job of answering this question.  But in case the chart is not clear enough the answer is risk management.  Global macro as an asset class has long held up well in any market with a penchant for bad markets.  In other words we tend to outperform in bad markets and do decent in good markets.  In the chart below you can see how our drawdowns compare to the SP500. (Click on chart to enlarge)

Drawdowns Year To Date

A few other observations that may or may not have anything at all to do with the initial subject of this post-

-We have seen few opportunities this year that have warranted an oversize allocation

-The SP500 is way to risky for the returns that it generates

-If markets are efficient how was the SP500 above 1250 for almost a year and then at 1100 a few weeks later

-There is no reason that you need to do what everyone else is doing

-Bill Gross is smart but he too can be wrong

-Warren B is also smart and can also be wrong

-95% of news is noise but we read it all in hopes of recognizing the 5%

-Anyone with the nickname Helicopter Ben is just looking for reasons to drop money from the sky

-If you aren’t at least semi-comfortable in Excel there is a high likelihood that you do not even know what due diligence is

-It is clean looking but so far Google+ is not Facebook

-More Money Than God is a great book

-The New Market Wizard interview of Stanley Druckenmiller is read by this author at least once every month or two

-Major bottoms and tops take more then a few days to form

-Yellowstone is awesome and everyone in America should go at least once every five years

Have a great Labor Day Weekend!!!!!!!!!!!!!!

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Disclaimer-We are long Friday both the day and the excellent song by Rebecca Black .

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Junk Spreads and Initial Unemployment Claims

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Disclaimer-We are long US Treasuries and Gold.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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