Wednesday, September 17, 2008

Understanding the subprime meltdown

My [awesome] accounting professor at Stern, Dan Gode, sent his classes the following link, which offers the best explanation of the subprime mess that I've heard thus far:

http://thislife.org/Radio_Episode.aspx?sched=1242

The full webcast is about an hour long, but if you're as curious as I am about why Fannie, Freddie, Bear, Lehman, and AIG failed and a pack of others are on the brink of extinction, you will want to listen to the story in its entirety. Think: Boiler Room meets Outbreak.

Thursday, May 22, 2008

Keep your eye on Crude…

Finally traders are talking about the supply/demand fundamentals that are the backbone of this Bull Run in the energy complex. Players like Goldman Sacks, T. Boone Pickens, and UBS have seen the light and are predicting anywhere from $150-$200 a barrel oil. However, we still have the naysayers talking about an oil bubble driven by the speculators.

The energy complex has been driven by the exponentially growing global demand and tightening supplies. No such bubble.

Let’s talk numbers...

World oil production is estimated to be 84 million barrels a day (excluding disruptions), while world oil consumption is 87 million barrels a day, leading to a world deficit in oil and oil products putting upward pressures on prices.

This supply/demand conundrum married with the increasingly dangerous geopolitical risk of the market, the weakening dollar, and the technical trade point to a precipitous rise in prices.

Moreover, if you look at long-dated oil futures contracts there is a contango in effect. Meaning that there is more of a premium for the longer-dated contracts (i.e. the further you go out in time the more expensive). The super-long-dated contacts, such as the Dec2016 is trading well over $140 a barrel. Factors mirroring the bullish sentiment in the market.

Yesterday, the energy complex rose on the news of drawdowns in crude oil and RBOB inventories. According to the DOE, crude oil inventories fell by 5.4 million barrels while RBOB inventories fell by 800 thousand barrels.
Light, sweet crude for July delivery rose $4.19 to settle at $133.17 a barrel on the Nymex. Prices continued the move in after-hours trading crossing $135 a barrel for the first time.
All other energy futures also traded higher. June gasoline futures rose 9.21 cents to settle at $3.3965 a gallon after rising to a trading record of $3.4081, and June heating oil futures rose 13.34 cents to settle at $3.9084 a gallon after setting a new trading record of $3.9187.
It’s not too late to make money in the energy complex.

Fundamentally and Technically crude oil is strong buy. All short-term and long-term technical indicators point to higher prices. If Crude trades through the first resistance level of $134.86 a barrel, than it will trade trough the second resistance level of $135.09 a barrel (intraday high). Furthermore, heating oil, RBOB, and Nat Gas all offer profitable trading scenarios.
My opinion hasn’t changed; traders should only be long this market!

Tuesday, May 6, 2008

Keep your eye on Crude oil…

In NYMEX trading on Monday, light sweet crude once again rose to record levels, touching $120.36 before settling at $119.97 a barrel. Confirming that the bulls are firmly in control of the market.

Crude oil sharp rise can be attributed to a microcosm of factors. First, the shorts were squeezed and forced to cover positions. Second, there were upward price pressures driven by mounting supply fears throughout the world. In Nigeria, the second largest exporter of crude to the U.S., has suffered continual violent attacks on major pipeline and flow-stations. American oil interests in Iraq were threatened by Kurdish rebels. Moreover, Iran the second largest OPEC producer refuses to withdraw from its nuclear program causing global concern. Lastly, the dollar lost some ground against other currencies.

Furthermore, In the face of record prices global demand continues to grow outpacing U.S. demand deconstruction, this coupled with the supply issues lies the fundamental basis for the market.

How to trade it…

Technically crude oil is strong buy. All short-term and long-term technical indicators point to higher prices. If Crude trades through yesterdays high of $120.36, it will test the first resistance level of $120.93 a barrel (intraday high).if it trades trough that level it will test the second resistance level of $121.60 a barrel. Where there should be some profit taking. My opinion hasn’t changed; traders should only be long this market.
Note: we are in a long-term bull market, however there are corrections (last week), but they don’t last long. Take advantage on these corrections and buy the dips

Wednesday, April 30, 2008

April 30, 2008



Analysis of today’s events:

The fed decided to cut the benchmark rate .25% as was expected. The dollar did not show much reaction to the news, reflecting the fact that this was already priced in. The Fed did express concern about rising food prices and inflation overall which leads one to believe that rate cuts may stop in order to strengthen the dollar.

How this affects crude oil:

The weaker dollar has been one of the primary causes for the increase in crude oil prices as well other commodities over the last 2 years or so. A stronger dollar will slow down the current bull market dramatically as dollar-priced commodities get more expensive for non-dollar currencies.

Crude Oil Technical Analysis:
Looking at the one chart we can see that crude went from about 100 to a high of 120 before the pullback last few days. On 4/29 crude met support at 115 before slightly rebounding. Today (4/30) it broke through the 115 level and went as low as 113.8 before closing at around 115. This suggests that 115 may be a local resistance level as long as this pull back is occurring. Next level to watch is 112.50 (which also happens to be a Fibonacci level) and then about108.8. It would not be surprising to see prices range between 115/118 and 109 before breaking out again on the upside. Long term fundamentals have not changed for crude oil and natural gas and the trend is still bullish long and medium term. Its also interesting to note that RSI signaled an overbought level even as prices fell today which is a sign that price may fall rather sharply and quickly through these level once the buying pressures dies down.





Awaiting the Feds decision…

Wednesday, the Federal Reserve will end two days of intense meetings and decide on monetary policy. There has been an underlying sense of uncertainty in the market awaiting the Feds decision on interest rates.

On September 18, the Federal Reserve cut the key interest rate for the first time in three years by 50 basis points to 4.75% in order to stimulate the slowing economy and counter the precipitous drop in the housing market. Since then the Federal Reserve has cut interest rates another 250 basis points to 2.25 percent.

What variables will the Fed consider..?
-The Housing market- which is at multi-year lows
-Inflationary pressures i.e. Oil and food prices
-Employment numbers
-GDP numbers
-The Dollar

It has been the consensus that the Fed will cut another quarter point for pure market psychology to 2 percent. However, the main focus of the meeting will be the Feds comments on inflation and future action. If the Fed implies that they are hawkish on inflation that will strengthen the dollar and possibly break the trend in the commodities market. However, if the Fed stresses that they will continue on the current path to stabilize the credit and housing markets the current trends are indubitably intact.

A lot can happen in one day!

In Tuesday’s trading session, crude oil fell more then $3 to settle at $115.63 a barrel. While Gasoline futures eased $.0912 to settle at $2.939 a gallon. The energy complex was under numerous influences. First, the major North Sea oil platform in Scotland came back online, the strengthening of the dollar in the face of the Feds decision, and the IEA report on crude and gas demand. The report stated that demand for petroleum products dropped 8.5% and demand for gasoline fell 6.2% in February. Alleviating some concerns on supply/demand imbalances.

However, one should not put to much merit into one report. The landscape is changing on a daily basis with incessant volatility, where traders should move ahead with cautious optimism deciphering all pertinent data (The Fed, dollar, inventory numbers, Nigeria, Iran, market politics, etc.) and hedging their trades fittingly. It is my opinion that we are in a long-term multi-year bull market and the tides didn’t turn just yet.

Note for safe bet: earnings, earnings, earnings. In the energy complex, I like the drillers. Whether oil is at $100 or $130 a barrel it is still profitable and should report strong numbers. As for the rest of the market concentrate on companies that have good earnings and are still making money. Even with the recent run-up, there are still value plays left.

Monday, April 28, 2008

Crude and the energy complex…

The combination of recent refinery problems, the weakening dollar, speculative buying, and rising global demand will cause a precipitous spike in crude oil and its products.

In Scotland, we got news that workers walked of the job at a major North Sea oil pipeline that produces over 700,000 barrels of oil a day. It is estimated to cost over $100 a-day in lost production. Furthermore, two of the largest oil companies cut production by an unspecified amount at their Nigeria Niger Delta refinery due to militant attacks. Nigeria, the worlds 8th largest supplier of oil has suffered four pipeline bombings last weak further tightening world production. According to recent studies, world crude oil supplies are already down 6% from a year ago. The politics of the Middle East still remain tense, as seen last week’s incident with Iran. Roughly 20% of the world’s oil flows through the Strait of Hormuz that Iran has the ability to block. This married with the weakening dollar and the speculative inflation hedge further puts upward price pressures on crude oil and its products.

$125, $130?? In the short term i see higher prices, however, in the future, due to the politics of the market i do see a pullback in prices.

Keep your eye on RBOB…

Gas prices extended further into record territory surpassing $3.55 a gallon on more news of tightening supplies. Gasoline inventories unexpectedly fell 3.2 million barrels last week raising concerns of future fuel supply levels as we approach the peak summer driving season.

Could we see $4 a gallon at the pumps?

RBOB futures have followed the rest of the energy complex higher in recent sessions. Gasoline prices that we pay at the pump are influenced by a number of factors; the futures market, crude oil prices, the dollar, and refinery utilization. The crude-gas crack spread has been widening causing refiners to cut production due to low profit margins. Refiners have been unable to raise gas prices in conjunction with the soaring cost of crude. Moreover, there is a shortage of a necessary additive for making summer grade gas called Alkylate-Further putting upward pressure on the price of gasoline.

On a percentage basis, there is tremendous upside potential in RBOB futures.
Higher crude prices+falling dollar+tightening supplies+speculation= higher Gasoline cost