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Petr Message Board

  • musketeernumberone musketeernumberone Feb 9, 2011 12:21 PM Flag

    Put/Call Brazil

    Bloomberg TV yesterday reported a Put/Call ratio of 1.80% on the Brazil big-cap ETF EWZ. They said that the last time this happened the BOVESPA fell some huge amount (I forget, but something like 40%!). Clearly,the Street expects a big decline in emerging markets on the heels of a managed slow-down in China. EWZ is almost 15% from recent highs.

    I think it safe to say that if China slows significantly, hard commodities would also be taken down. Oil could follow, as could soft commodities, precious metals, other EMs, etc.

    The Chinese CB has announced it intentions with Bernanke-like clarity. Is there any reason to doubt their resolve? I think not. So what is an investor to do?

    I think the US economy can continue to improve and that our stock markets go higher -- not without volatility, but we have a trend and the trend has underpinnings. Notably, media companies are all beating expectations -- that means companies are advertising. Services of all kinds should do well. Transports. Retail. Industrials.

    I keep thinking about really deep cyclicals that have not yet participated in the recovery, like refiners. Similarly, I recently bought Vulcan Materials -- they mine high-tech materials like sand and gravel, and they will benefit from the slightest increase in construction, housing and infrastructure.

    The long terms future may belong to Chindia, but the next few years belong to the S & P 500.

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    • On Feb 4th, the difference in price between Brent and WTI crude was $8.70. As of today, the spread is a whopping and laughable $18.29. Now what is funny is how some commentators are tripping all over themselves in an attempt to explain this on the basis of supply and demand.

      To repeat, the WTI is a superior grade of crude to Brent even though the Brent is priced higher.

      So people take a look at these two grades of crude and have to come up with some story to keep the mythical story of price based on supply and demand going.

      One story is that there is a bottleneck at Cushing, OK, where WTI crude is delivered is upon completion of an oil contract. Problem is that this bottleneck has been present for the last three years.

      The other one I have read is that WTI crude is mostly landlocked while Brent is not. That explanation is even worse because that has been the case for thirty years.

      A real issue is that WTI and Brent are only a small amount of the world's oil supply, but they are part of a larger trend. Middle Eastern, African, and European prices were about $8 more per comparable barrel in the Americas a week ago. Now it looks like that spread has gone to $15 a barrel. We should get better data on this in two days.

      I think the real reason for this spread is where the oil is traded. The European, African, and Middle Eastern oil are traded in Britain, and the American crudes are traded on the NYMEX. What this spread shows without a doubt is how rigged the markets truly are. American regulation, as pathetic as it is, has bested British regulation.

      The no brainer trade to make on this spread is to go long WTI and short Brent, but if you did this in the last week, you got killed.

      Eventually, supply and demand will rule, and these two grades of oil will be back to trading within a buck or two of each other. However, the real issue is the when.

      I had no problem being a contrarian and investing when the markets were irrational and biding my time waiting for the market to come to its senses. But this is not an irrational market; it is a rigged market.

      I think the time to go short Brent and long WTI is when an article comes out that talks about how rigged the markets are. As long as we see story after story about how this spread is based on supply and demand, IMO the spread may not only stay, it may get worse.

    • << While GDP is a good indicator, not the last word for energy consumption. Even if you believe that the economy has recovered fully and energy consumption has hit new highs, the specific consumption of gasoline for autos and trucks could decrease due to alternative fuels.... no ? >>

      What alternate fuels?

      Ethanol, after you deduct all the diesel and NG inputs gives us very little ( higher food prices excepted) in terms of additional net fuel.

      And wind and solar hardly contibutes anything never mind for liquid transportation fuel.

      Plus most analysts forget all about all he additional investment that would be required to allow for wind or solar to be utilized for transportation.

      As to any link/correlation between GDP and Fuel usage , there's a huge misunderstanding as to the US having become so much more energy efficient.

      what a joke.

      The US economy went through a dramatic and structural shift that precluded the need to use so much energy domestically but not the reliance on energy.

      Think about it.

      what happened was a shift in where energy is consumed.

      When a country starts to import more goods than it exports, there's a shift that occurs in where the energy is consumed. That is all.

      I would hardly call any reduction in US energy consumption per unit of GDP an increase in energy efficiency if all that was done was to shift high energy activities offshore.

      And in terms of energy reliance, any argument that portrays the US as being so much less reliant on energy now as compared to the past is full of crap.

      Our standard of living is not so dependant just on the energy we consume domestically and to think that way is terribly naive.

      And should the US become protectionist and bring industry back home, just what do you think that might do to energy intensity in terms of GDP?

      The analysis and propaganda we get from most mainstream media and economists these days is a joke.

      Most of it is a deliberate attempt to mislead.

      Surely, they aren't that stupid??

      Or are they?

    • While GDP is a good indicator, not the last word for energy consumption. Even if you believe that the economy has recovered fully and energy consumption has hit new highs, the specific consumption of gasoline for autos and trucks could decrease due to alternative fuels.... no ?

      Take diesel fuel for instance, not exactly an alternative fuel, yet the amount of diesel vehicles on the rise.

    • Just to add some local color to the subject: Brazil*s finance minister is saying that all the stimulus that was added in the wake of the crisis will now be reversed. They are exiting the stimulus program because it all worked fairly well, but now they have to contend with accelerating inflation.

      So Brazil is doing well. But markets don*t like it when interest rates go up, lending gets restricted, government spending gets reigned in, and a country*s biggest customer (China) taps the breaks.

      EEV, anyone (up 4.3% today)?

      • 1 Reply to musketeernumberone
      • There are several articles stating all sorts of reasons for the widening spread...including production declines in the North Sea, oversupply at Cushing, perceived demand variances, currency exchange anomalies, etc. etc. etc.

        Although many of these factors are relevant, the reason for the spike was a very large short position placed on Brent that was squeezed to high heavens. If this proves to be true, then we'll see the spread narrow over the next few months.

    • Yeah, China taps the brakes just a bit and you get a little glimpse into how skittish some of the commodity trade money is. SID goes right up against the windshield.

      I dunno about the refiner idea, and this caution is a little ironic given how much money I made on the like of VLO and TSO in the '03-'08 time frame. There's been a lot of capacity added in places like India and China. I know the US based refiners are doing a brisk business in exporting distillates, but otherwise the US market is saddled with too much capacity and tepid demand growth. Of course, I thought this three months ago and the stocks have popped in the mean time, so wtfdik.

      • 3 Replies to petroglyph56
      • Seems to me the most competitive refiners in the US right now might owe it to their geographical location rather than their technical capabilities.

        Those located away from the coast and able to take advantage of cheap landlocked WTI prices probably can't easily export products.

        OTOH, the refiners that might be the most technically advanced but have to pay 'global' prices for crude like those on the Gulf Coast probably aren't any more (globally) competitive now than before the Brent/WTO spreads widened.

      • I am with you, PG. Refining in the U.S. has been an absolute no growth in demand story over the last three years, and I don't see that trend reversing at all.

        <I know the US based refiners are doing a brisk business in exporting distillates.>

        I checked the numbers on that and was surprised to see how much refiners are making exporting distallates. They have increased distillate production by 0.5
        mbpd but have seen little to no increase in demand, so they must be selling it abroad. I wondered why the price of diesel fuel has been going up and didn't realize what U.S. refiners were doing.

        Everybody talks about crack spread and refiners but right now, the real issue with spread is the spread between WTI and Brent. Clearly, with this spread, U.S. refiners have a huge edge with lower input costs.

        I really haven't read a good explanation as to why there is such a spread. IMO a lot of it has to do with the fact that Brent is traded on the unregulated ICE exchange and WTI is traded on the regulated NYMEX. But the problem with that theory is that those exchanges have been regulated like this for years, and the spread has never been this high.

        PG, do you have a theory as to why that spread exists? Does it make sense to you? It sure as hell doesn't to me.

        So the real issue IMO with the U.S. refiners is that they are going to killed if/when the Brent/WTI spread narrows.

      • Given profitable results in the past, what is your hesitation on refiners? If there is excess capacity now, it should be filled over time... No?

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