Author: John

Another dose of reality, Morgan Stanley last week dropped a “bomb” on some by indicating that investors in U.S. Government bonds will face inevitable defaults due to an aging population and increased difficulty in securing tax revenues in their latest research paper.  While our government debt to GDP in only 53%, our debt to government revenues is 358%, one of the highest levels in the world.  For Morgan Stanley, the question is only which debts do they default on and which do they not, adding that the sovereign debts crisis is global and not over yet.  With defaults inevitable and the U.S. likely on that list, the risk remains that growing concerns over our ability to service debt will begin to force yields up as they have in Europe, adding more pressure to an already fragile economy and forcing a reduction in debt financing that will force us to balance our deficit at a minimum which is currently at 9% this year (government tax revenue below its spending) at over $1.3 Trillion.  The government is just an extension of our wallets at the end of the day, and if they run up a bill that can’t be refinanced and otherwise “comes due” in the next few years, the economy and the consumer will be the one coming up with those funds and one can imagine what that will do the economy…”inevitable defaults.”       

We continue to see selling as investors move toward safe-havens or prepare to take profits for month/quarter-end.  Sentiment has shifted negative on the economy and we expect lower energy trade to prevail in the next week or so.  There appears to be a tri-fecta of bearish influences in fundamentals, technical, and macro-economic influences and that usually leads to, in this case decidedly lower prices.

It’s important to remember to view the longer term picture through the day-to-day market “noise.”  Short-term things look bearish due to poor economic recovery.  If/when the economy takes root, the energy markets will turn with it, thus the importance of long-term hedge thinking/program.

To what extent will energy prices be effected by the Chinese government’s move to let the yuan appreciate against the world’s currencies?  This move by the Chinese is giving that country more buying power which is helping equities there and abroad and raising the prospects for increased fuel demand implications.  It’s key to note that while the peg was floating, which ended two years ago, the energy complex put together its largest bull run in history as a “rising China” looked to increase fuel demand almost exponentially.  Given the 50% increase in car sales last year, the double-digit increase in oil demand YoY, and the idea of a China with more buying power down the road, the energy complex may once again be pricing in massive Asian demand growth that may overshadow weaker readings from the world’s mature economies….a painful combination for U.S. consumers.  This is a significant market impact as China remains one of the few legitimately bullish factors for energy prices today.

Markets are trending  higher, boosted by further weakness in the dollar and higher equity futures.  The unwind in currencies is helping support the various asset classes, but the economic data remains mixed and that has kept the rallies in relative check.  The market is looking for more evidence as to whether growth is slowing (or not), and if they find it we think this week’s rally and possibly last week’s could easily be undone.  If the reports are good (and so is the DOE storage report), $75 in crude will likely become near-term support for the rest of the month.

Crude has halted its downturn and is finding support as equities rally modestly on a mixed bag of news.  As long as nothing is decidedly bearish, most investors are willing to be optimistic rather than pessimistic.  It seems like the market in general continues to make excuses for the sub-par employment picture and more recently seem to be surprised by the divergence between initial jobless claims and other employment data.  We remain concerned that employment is not as strong as advertised, especially with the level of government payments in the form of unemployment benefits being sent out to nearly 5 million individuals. 

Equities will continue to dictate energies general direction, but with leading economic indicators turning over, recent data showing a slowing rate of improvement, and with energy inventories at extremely high levels, we feel that bearishness still looms.

Energy markets are trending higher as further strength in equities here and abroad and mild weakness in the dollar continue to provide macro support.  That said, the last several days have seen sharp gains but a likely decline in open interest, and indication this is a short-covering rally ahead of month-end and the holiday, not fresh buying.  After nearly a straight month of declines, it should be no surprise to see this kind of rally on limited news.  We  will look to next Tuesday’s action as an indication of true market sentiment.

Markets are selling off again as continued concerns regarding Europe further the flight-to-safety trade as credit spreads widen, bond yields slip toward fresh lows, and assets classes like equities and energies continue to get pounded.  Yesterday’s holiday for several European markets helped keep things somewhat quiet, but now it’s back to game-on as investors continue to take risk off the table in earnest.  Equities should continue to dictate energy’s direction and magnitude of movement near-term, and right now that direction is decidedly lower.

Markets are trending sideways to lower today after another sell-off Wednesday as a slightly weaker dollar and flat equity futures give the market some pause for now.  The DOE report yesterday was neutral to bullish by the numbers, but weak product demand continues to shake the nerves of some traders with inventories remaining at better than 10-year highs.  The euro’s higher turn Wednesday may be the beginning of the end for the euro-run with the dollar index rising over 1000 points in evening trading yesterday, but the brief drop below the 200-day moving average in the S&P 500 Wednesday also indicates this is not just a currency story anymore.  Equities remain the directional indicator for energies near-term, and the trend there remains lower right now.

Energy and equities markets continue to run into selling, as fears connected to the euro-zone remain.  That said, the EU isn’t the only reason to be turning bearish as yesterday’s PPI data and a double-digit fall in housing permits indicate growth here in the U.S. may be slowing as well as stimulus efforts begin to sunset.  Adding to that today was the Mortgage Bankers Association reading on mortgage applications which fell an astonishing 27.1% for the week, its lowest reading since May 1997 (13 yrs) and further confirmation that any housing stability has been government-driven and artificial.  Furthermore, this comes as mortgage rates for an average 30-year sit at 4.83%….just a few basis points from March 2009’s record low of 4.61% (the point is housing hasn’t been driven by rates but free tax money). 

Looking at the 2010 economic powerhouse, Asia and more specifically China, the Shanghai Index is down more than 20% from its peak and already signs of slowing are being seen in China’s high-end property market.  Demand for commodities also appears to be waning from the massive YoYo increases seen in the last 6 months, and so no matter where you look we are seeing signs of slowing.  The U.S. still looks to be performing well near-term, but the now sharply higher dollar isn’t going to do anyone here any favors moving forward.  The equities market (and similarly the energy complex) has been pricing in a robust and near-perfect V-shaped recovery all along, and now we are seeing that this view may be a little too optimistic. 

Looking at gasoline demand alone, the EIA still indicates that consumption is more than 360,000 bpd below 2007 levels….undoubtedly part of the reason why inventories remain above the high-end of the 10-year range.  The energy complex remains decidedly bearish as the macros continue to influence the complex negatively.  Further weakness in equities will likely lead to still lower energy futures near-term.

Markets are trending sharply higher this morning as the EU with the IMF put forth a nearly $1 Trillion bailout package to stem the rising crisis in Greece and the rest of the euro-zone.  This has helped assuage near-term fiscal concerns which are helping the euro vs. the dollar, but at the end of the day this is not a solution but more kicking of the can down the road (did they solve Greece’s problem, no).  Is anyone noticing our can is getting pretty flat with all this kicking, and now isn’t rolling as well these days?  Energies are reacting as they should given the Dow is up nearly 400 points, but with gains of only $1.50 to $2/bbl in crude to levels just above $76……we wouldn’t say the complex is quite as bullish as the outside markets would otherwise indicate.