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Crude Awakening
28 January 2016
War Room
HiddenLevers War Room
Open Q + A
Macro Coaching
Archived webinars
CE Credit
Idea Generation
Presentation deck
Product Upda...
Market Update
Oil Redux
Scenario Update: Crude Awakening
Crude Awakening
HiddenLevers
MARKET UPDATE
Market Update
sources: HiddenLevers, Forbes, Zerohedge, Guardian, Atlantic, Wikipedia
1
Zimbabwe
China Colony
2
3
Obamacar...
Market Update: Fed Mea Culpa
4
sources: HiddenLevers, WSJ, Marketwatch
March rate
hike off the
table
2015 Fed
Stress Tests...
Market Update: January Correction in Context
sources: Yardeni Research
Year S+P Return %
Recession
?
1948/49 -59 Y
1957 -2...
HiddenLevers
OIL REDUX
Oil Redux: Phases of the Crash
sources: CBC
Phase 1
•US Dollar rise
•No risk premium
Phase 2
•Saudis pumping
•Everyone pum...
Oil Redux: Max Draw Down Comparisons
sources: HiddenLevers
Current Oil correction is in line with 1980 and 2008 crashes.
-...
Oil Redux: Supply / Demand Balance
sources: HiddenLevers, OilPrice.com
Demand Factors:
• Global growth slowdown
• US deman...
Oil Redux: Equity / Oil Correlation
sources: HiddenLevers
Year
Oil
Loss
%
S+P
Return
%
1985/86 -59 +22
1987/88 -35 -10
199...
Oil Redux: Energy Sector Impact
source: HiddenLevers
Upstream:
Need for cash = pumping all-out
Many firms will pump into t...
Oil Redux: US Economic Impact
source: HiddenLevers, Resource Reports, WSJ
Cheaper oil
=
HIGHER GDP
Cheaper oil
=
DEFLATION...
Oil Redux: Global Economic Impact
source: HiddenLevers, Resource Reports, Bloomberg
GDP pop from cheap Oil:
• India + Chin...
Oil Redux: Investment Posture
Opportunities Hedges
Airlines
Shipping + Transport
Lodging
Refiners
Non-energy in Resource C...
HiddenLevers
SCENARIOS: CRUDE AWAKENING
Scenario Update – Many in Play
Oil Crash
Good
Bounce
Back
Bad
Isolated
Crash
Ugly
Perfect
Storm
$32 -33%
$48
PRICED
IN
$74 +50%
key
lever
OPEC relents or...
BAD: Shanghai Crash
foreign
money no
come back
China markets struggle but S+P in tact
source: HiddenLevers, WikInvest, For...
UGLY: China Recession
triple
bubble pop
source: HiddenLevers, Economist, ZeroHedge,
seismic
economic
changes
China posts n...
BAD: Tech Reality Check
some
unicorns
die
Nasdaq stops outpacing S+P
source: HiddenLevers
SF property
market
correction
no...
UGLY: Dot Com Déjà Vu
more muted
than 2000
crash
source: HiddenLevers
valuations
questioned
across tech
Fed may
restart QE...
Crude Awakening: Three Big Risks
Progress
58%
S&P
-10%
Progress
43%
S&P
-12%
Progress
39%
Energy sector bankruptcies
will ...
Crude Awakening – Take Aways
Russia is primary
default risk on Cheap Oil
China more downside impact on
US than cheap oil
C...
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Crude Awakening

  1. 1. Crude Awakening 28 January 2016 War Room
  2. 2. HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck Product UpdatesScenario Updates
  3. 3. Market Update Oil Redux Scenario Update: Crude Awakening Crude Awakening
  4. 4. HiddenLevers MARKET UPDATE
  5. 5. Market Update sources: HiddenLevers, Forbes, Zerohedge, Guardian, Atlantic, Wikipedia 1 Zimbabwe China Colony 2 3 Obamacare worries mount Finance Industry in Limelight
  6. 6. Market Update: Fed Mea Culpa 4 sources: HiddenLevers, WSJ, Marketwatch March rate hike off the table 2015 Fed Stress Tests dead wrong on oil Foreign QE ECB + China too early or too late? Still no 2016 Fed Stress Tests
  7. 7. Market Update: January Correction in Context sources: Yardeni Research Year S+P Return % Recession ? 1948/49 -59 Y 1957 -21 Y 1962 -26 N 1966 -22 N 1968/70 -36 Y 1973/74 -48 Y 1976/78 -19 N 1980/82 -27 Y 1987 -34 N 1990 -20 Y 1998 -19 N 2000/02 -49 Y 2007/09 -56 Y 2011 -19 N Aside from 1987 crash, all 30%+ corrections were part of a recession. Even if current 12% drop doubled, recession not guaranteed. 5
  8. 8. HiddenLevers OIL REDUX
  9. 9. Oil Redux: Phases of the Crash sources: CBC Phase 1 •US Dollar rise •No risk premium Phase 2 •Saudis pumping •Everyone pumping •China Slowing Phase 3 •Iranian oil back •US demand flat •Tech advances
  10. 10. Oil Redux: Max Draw Down Comparisons sources: HiddenLevers Current Oil correction is in line with 1980 and 2008 crashes. -76% -71% -70% -55% -55%
  11. 11. Oil Redux: Supply / Demand Balance sources: HiddenLevers, OilPrice.com Demand Factors: • Global growth slowdown • US demand stagnant / dwindling • Electric Vehicles • US Demographic Shift Supply Factors: • US producers hedged into 2017 • Iran production ramp-up • Saudi / OPEC still not cutting?
  12. 12. Oil Redux: Equity / Oil Correlation sources: HiddenLevers Year Oil Loss % S+P Return % 1985/86 -59 +22 1987/88 -35 -10 1990 -27 +5 1990/91 -45 +23 1997/98 -55 +54 2000/01 -53 -21 2003 -31 +11 2004 -34 +5 2006/07 -35 +12 2008 -76 -29 2010 -21 -9 2011 -32 -15 2012 -29 -2 2014/16 -70 +3 14 OIL corrections  Six S&P 500 declines • Recessions knock down both oil + equities • Mid-cycle oil crashes have little impact
  13. 13. Oil Redux: Energy Sector Impact source: HiddenLevers Upstream: Need for cash = pumping all-out Many firms will pump into the teens (eg FCX @ $16/barrel cash cost) Many firms’ shares down 90% Downstream: Refiners’ profits up on cheap oil Retailers’ profits up on cheap gas Refiner ETF has ½ downside of S&P Midstream: MLPs hit by lack of future growth Many MLPs are overleveraged MLP ETFs down 50% -90% -50% +5%
  14. 14. Oil Redux: US Economic Impact source: HiddenLevers, Resource Reports, WSJ Cheaper oil = HIGHER GDP Cheaper oil = DEFLATION Cheaper oil = NO IMPACT ON CORE INFLATION Cheaper oil = MORE PEOPLE EMPLOYED Cheaper oil = PAYROLLS INCREASE Cheaper oil = MORE SPENDING
  15. 15. Oil Redux: Global Economic Impact source: HiddenLevers, Resource Reports, Bloomberg GDP pop from cheap Oil: • India + China • Japan + S. Korea • Eastern Europe • SE Asia ex Malaysia Sovereign Default Risk: • Russia Resource Countries Benefit too: • Canada • Brazil • Chile
  16. 16. Oil Redux: Investment Posture Opportunities Hedges Airlines Shipping + Transport Lodging Refiners Non-energy in Resource Countries Solar Non-energy High Yield sources: HiddenLevers Utilities Energy Importing Countries (Japan, India) Refiners Don’t believe the hype!
  17. 17. HiddenLevers SCENARIOS: CRUDE AWAKENING
  18. 18. Scenario Update – Many in Play
  19. 19. Oil Crash Good Bounce Back Bad Isolated Crash Ugly Perfect Storm $32 -33% $48 PRICED IN $74 +50% key lever OPEC relents or Shale producers fold. Almost 60% decline in oil since summer 2014, S&P has been flat. Oil prices pierce financial crisis lows. Unlike 2008-09, no V-Shaped recovery for Oil. Jan 2015 WAR ROOM
  20. 20. BAD: Shanghai Crash foreign money no come back China markets struggle but S+P in tact source: HiddenLevers, WikInvest, Forbes, CNBC, WSJ negative wealth effect RE + credit bubbles don’t pop 69 P/E, above 2007 peak Still holding! margin calls actually happen -4 -32 July 2015 WAR ROOM
  21. 21. UGLY: China Recession triple bubble pop source: HiddenLevers, Economist, ZeroHedge, seismic economic changes China posts negative GDP as a consumer nation govt actions far exceed US in 2008 China is world’s #2 consumer government caught lying drags down commodities producers July 2015 WAR ROOM
  22. 22. BAD: Tech Reality Check some unicorns die Nasdaq stops outpacing S+P source: HiddenLevers SF property market correction normalizing P/E ratios 1y return SPX +12 Nasdaq +23 May 2015 WAR ROOM
  23. 23. UGLY: Dot Com Déjà Vu more muted than 2000 crash source: HiddenLevers valuations questioned across tech Fed may restart QE Unicorns crashing spooks Nasdaq SPX less damaged, a la 2000 AAPL GOOG take a hit May 2015 WAR ROOM
  24. 24. Crude Awakening: Three Big Risks Progress 58% S&P -10% Progress 43% S&P -12% Progress 39% Energy sector bankruptcies will rise as oil hedges roll off. Low commodities prices are tied to weak global growth, but US likely avoids recession. Unicorn are being revalued 50-75% lower now, and tech IPOs are mostly on hold. Further downside possible if tech growth story weakens (AAPL, other FANGS) China appears more likely to slip into first recession in 30 years, with a devastating impact on its suppliers. US impact muted, but could result in mild bear market Commodities Perfect Storm Dot Com Deja Vu China Recession S&P -16%
  25. 25. Crude Awakening – Take Aways Russia is primary default risk on Cheap Oil China more downside impact on US than cheap oil Cheap Oil = net benefit (to most countries) OPEC action needed to lift Oil Prices

Crude Awakening

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