Oil

Smart Money Insights: Weekly Brief Apr 4

In the words of one hedge fund manager, “At least it’s over.”  This is the typical refrain about the first quarter – for many, what was supposed to work, didn’t.  Small mistakes led to punishing losses.  “Prudent” de-risking in February locked in losses after six weeks of relentless market declines and caused many managers to watch in disbelief as the markets recovered by the end of the quarter.  “Short covering” and unwinding of popular trades inflicted larger than expected losses on some preeminent fund managers.  Here’s a recap of what was working and what wasn’t: Recession Risk is Down Hedge …

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Smart Money Insights: Weekly Brief Mar 21

If March ended today, the first quarter of 2016 would look like a “yawner”: the S&P 500 index rose modestly, emerging markets and commodities bounced nicely after a terrible 2015, some of last year’s gains on the dollar reversed (which eases pressure on corporate profits), and bonds performed nicely in a world of slowing economic growth and aggressive monetary easing. Completely absent from this narrative is the violent churn beneath the surface and the damage to many investment portfolios. In that context, it’s worth revisiting some of the drivers of market volatility this year. Is the US heading into recession? …

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Smart Money Insights: Weekly Brief Mar 7

It’s been an interesting few weeks, to say the least. Equities have recovered, but gains have been very uneven. Some macroeconomic fears have abated, or at least moved off the front page. In this weekly update, we check in on some of the major themes over the past several weeks, such as the likelihood of a US recession, the next move in central bank policy, whether China will devalue, the likelihood that oil has bottomed, or whether there will be contagion from energy sector high yield bonds. Is the US heading into recession? (update from Feb 22) In the first …

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The Trouble with Oil (Part Three)

One thing that I’ve realized is that there’s a disconnect in how different investors think about oil. For asset allocators, oil and commodities are a financial asset. Volatility and drawdowns are viewed like those of a stock. Oil down 20% feels a lot like a stock down 20%. For investors in oil company stocks and bonds, however, a 20% decline in oil is much more serious. A stock price primarily reflects a company’s equity and earnings prospects; oil, on the other hand, reflects revenue. A 70% drop in crude prices is like GE selling every product at 70% off. Framed …

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The Trouble with Oil (Part Two)

Two weeks ago we wrote a post on oil (The Trouble with Oil Part 1)  – why it matters to equities these days, and how the initial market response (and pundit commentary) seemed to miss some key fundamental aspects of commodity supply and demand. What a difference two weeks makes.  A few updates: Oil is up more than 25% from the lows (below $27 per bbl ten days ago, close to $34 today). The focus has shifted from near term demand hysteria to medium and longer term supply issues. The first indication of a policy response – Russia essentially publicly …

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The Trouble with Oil

In an earlier post, we talked about market volatility when new risks move to center stage. Well, crude oil is center stage, to say the least.  Why?  Oil at $30 per barrel for a few years would lead to (literally) a world of hurt:  widespread bankruptcies in the oil patch, massive write-downs in bank loans and high yield debt, plummeting capital expenditures and further job losses.  Some emerging market nations would default.  This satisfies the “big downside” criterion. In late 2014, pundits generally thought the decline was a good thing:  every dollar lost by an oil company was a gift …

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An Excerpt from the Mid-Month Update

Given the market volatility, we provided a mid-month update to our investors.  The following is a brief commentary on the markets: For purposes of this update, we’ll highlight some ways in which the situation today is very different from 2008: On the positive side, while the Great Financial Crisis nearly pulled down the US financial system, which choked off the real economy, today US banks are less leveraged and have double ($1 trillion) the capital base relative to 2007.  US household leverage is lower as well. Likewise, there likely isn’t systemic risk from trouble in the high yield market, where …

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