Recap We did have second week of gain in stocks. The lead here is crude back to low to mid 30s level. News in the oil patch has gone more benign, guys "seem" to willing to coorperate. Vol $VOLATILITY S&P 500(VIX)$ is down below 20 at one point. You continue to hear guys on CNBC talking about recession as a 60% event and Buffett be like stay the course, invest in stocks. The sentiment has gotten better, but there is something in the back of head that tells you there is a leg down. To me, a market recession is likely, but an economic one is not.
Macro So where is crude going?
First, why its important If you pull up the correlation between crude and S&P. I can tell you that correlation is 70% +. Crude has more implication on the debt market in the energy patch, which we will touch later.
Supply/demand imbalance Bottom line is I think will see a range between $25-45 until everyone or majority of the oil producing countries agree to cut supplies meaningfully. Do I think the deal gets done? Yes ultimately, but Saudi is going to squeeze Americans as long as they can. Shale revolution? You can lose money for next 2-5 years, and it has become a competition of lower crude price vs how fast production cost can get cut with shale technology. There is almost no American E&P guys makes positive free cash flow at $30 oil. On the demand side, China wont be there anymore at 10mn a barrel everyday that fueld the crude rally to 120 since 08 lows. India may be there in 2 years, but despite favorable demographics, the business environment is still a unknown. So here this is our crude snapshot.
Nat Gas seen light at end fo the tunnel Production has grown at 10% clip since 2010, but will moderate here. Demand is flat to up just modestly, but I am more optimistic here with pricing at near bottom level and my view that America needs a infra refresh and economy is generally on track (transportation and etc). That doesnt mean you should do stuff like $VelocityShares 3x Inv Natural Gas ETN(DGAZ)$, go look at the forward curve first, its an ETN.
Debt Those, with some good data this week (housing), has not translated to a bigger jump in the treasury. 10 year hovering around 1.7% and 30 years still in the 2.6% range. The curve can tell you two things
1) We dont expect any inflation any time soon. Core inflation ex Energy is 1.7% in December. GREAT DATA! 2 year is like EH, I am going back to 80bp (versus 1% at year start), but Yellen is not raising rates. 2) We might head to something terrible. A flattening curve is precedent to bad things historically. So why ppl is buying up long end of the bonds? a) ppl are worried about economy, b) Jesus, let me put 100 dollars in yen, I get negative return? WTF, what about Europe? forget it, I am all in on 30 year. c) I have reiterated many times, buy $债券20+美公债指数ETF-iShares Barcla(TLT)$ when you are ahead. Its one of my best holdings this year so far, which means ppl buy it to hedge their portfolio. A better one than gold, in my view.
Issuance (I think this unique from me) The primary market is drying up in high yield corporates. Anything is B rated or below need a lot of work. Goldman, freaking GS, had trouble syndicating this LBO deal this week. The secondary tone, however, is getting better. People feel more like risk-on than before. $
Equities I would argue bank is cheap. Yes they have energy stuff on balance sheet. But I bet 99% of the people dont even know what investments bank has in those companies. NEWS JUST IN: those are mostly bank loans! 1st lien (look up in law dictionary) or 2nd lien debt claims.
Tough times right, thats when people turn to consumer staples. $KRAFT HEINZ CO(KHC)$ killed it this quarter. Buffett / 3G is the best operator I have ever seen. Do I love $伯克希尔哈撒韦(BRK.A)$? No, but you have to own some, its a way to own small business in America.
Retail looks challenging, but $彭尼(JCP)$ was strong with 4Q comp 4.1%. Continues to be a deleveraging story. I have advocated this long for a while now. Equity is going to break $10, and I think it's going higher. If you have 2 year horizon, I think its a double. Same applies to $Party City Holdco Inc.(PRTY)$, unloved and oversold. Solid story and deleveraging with cash fast.
Preview for next week Interesting stuff like Berkshire letter, will do a deeper dive. Guys has put out 13F for end of 15. Lets see what big guys like heading into 2016. Will do more intro in high yield.
Feels good to get started. Please comment if you have questions or opinion. Again we learn from each other. Your questions make me learn more! I can expand in details if you point to it. Please forward to your friend, and if you are big V, love to get some help to generate more traffic.