Did you get a load of the cover of last week-end’s Barrons?
Since it is so widely known that “this time is different” are the four most dangerous words in the history of finance, no self respecting financial commentator even suggests that it might be different this time without sticking a warning label on the article. So ignore the hedging done by the writer. Whether it is the question mark at the end of the title or the caveats stuffed into the meat of the piece – those disclaimers are par for the course for any article of this type. Instead of focus on what he wants to say, but is too chicken to go “all in.” He wants to say, “ignore the bears, this time is different.”
Of course, the fact that we are now up for the past 6 years and the Nasdaq 100 index is almost up 400% in that time period, is of no concern.
It makes perfect sense to suggest that this time is different, and that the Nasdaq strength is not the result of a Central Bank fuelled balance sheet expansion, but instead the start of a brave new world of perpetually high stock prices.
I am going to tuck that Barrons cover into the archives because I think there is a decent chance that this becomes one that they would like to take back.
Speaking of the Barrons cover, did you notice the other headline on the banner at the top? “Oil could drop to $35” according to the always illuminating Barrons.
During the last couple of weeks, I have been disciplined at letting the oil bears take it down without trying to catch the bottom. I have sat on my hands, and so far that has served me well. The decline has been relentless.
It is no surprise that articles like the ones in Barrons are now suggesting we could go to $35. Most forecasts seem to be nothing more than extrapolation of current trends. Crude oil went from $110 to $60 in the course of half a year – why shouldn’t it continue down to $35?
Although I am a huge skeptic about North American shale energy stocks (I think that there has been a bubble of epic proportions), the pessimism regarding the actual commodity has hit levels where I can’t resist trying to catch the falling knife.
I know all the reasons why over the short term, supply is only going to increase. I understand that companies and countries who are under economic pressure are going to have to sell more to make up for the declining price. But at the same time, I can tell by my trading twitter feed that there are a lot of crude oil shorts already positioned to take advantage of that fact. There are precious few trying to catch the bottom, but instead myriads gloating on every down tick.
But I want to remind everyone how this whole decline started. The Americans and the Saudis conspired to drive down the price of oil to harm the economies of both Russia and Iran. Now, there can be no denying that recently the Saudis have taken it a little too far. When the Saudis realized that global demand was stalling and that the Americans were vulnerable, they decided to really knock out some supply by pushing it to levels that were uneconomical for the new Western supply. This last move lower in the price of crude was on the heels of an OPEC meeting where the Saudis refused to cut back supply. Although with the rise of shale and oil sands supply, OPEC and the Saudis are becoming less dominant , don’t kid yourself about their ability to effect prices. The Saudis wanted to send the price down, and they have achieved their goal. They have stated a few times that they expect oil to stabilize at $60. My suspicion is that just like they had the power to send crude oil lower, they have the power to stop the decline.
Although the entire trading community is bearish on oil, I am going to take the other side of the trade. I think that at this point the downside is minimal. I know that everyone has extrapolated all sorts of doomsday targets on oil, but I am going to put my faith in the Saudis when they say that oil is going to stabilize around here. Given the preponderance of speculative shorts, it wouldn’t take much to put a squeeze on all these late shorts.
I started buying my favourite little energy stock – Ithaca Energy. It has gotten destroyed with the collapse in oil. With the sub $1 price, I think it is priced with a lot of pessimism.
But I am also trading the actual commodity. I have gone outright long a little bit. I have also sold some slightly out of the money puts. However, the trade that I think is quite interesting is to buy some collars.
I still contend that the chances of a geopolitical conflict are much higher than the market is discounting. The West is putting a lot of economic pressure on Putin. Maybe he folds, but maybe he becomes liked a cornered rabid dog. I just don’t know. Many times throughout history, political leaders have chosen to start a war to distract from economic problems at home.
Although the most likely path for crude oil is to meander between $55 and $75 for the foreseeable future, there is also the potential for a big move back up to $100 in the case of a geopolitical conflict. Especially given the new found bearishness of the speculative community, in the event of rising geopolitical tensions, there is a better than normal chance of a big move to the upside.
To take advantage of that possibility, I sold way out of the money puts, but at the same time bought way out of the money calls. If oil doesn’t go below $55, I make a tiny amount. If it goes under $55, I am long at that point as my puts will be exercised. At the same time if we get a spike to $100, my calls will kick in and I will also be long.