So ultimately, the homeowner is going to lose the house but when the Russian bank forecloses they will have to sell the house at a loss given the economy over there. Speculating in FX with your mortgage is really dumb. Most people didn't understand the loan. Fortunately, only 3% of the mortgage loans in Russia were tied to the dollar. Of course, over in Eastern Europe 10% of the mortgage loans were payable in Swiss francs because the borrowers were certain that the franc would never appreciate. Their mortgage just went up 15% in a week. If they can't refi soon into a more stable currency, homelessness awaits.
Just a bunch of ordinary people who gambled, made the wrong decision and lost. Which of course brings us to the punch line of the story. You see most of the commercial loans in the emerging markets are denominated in dollars or Swiss franc. If you want to do a big project in Asia or Africa the bank is going to loan you dollars or in your local currency if you so choose, but the bank is never going to take the risk of a local currency devaluation so repayment is specified in dollars or francs. If you are the borrower it all seemed safe. The franc was pegged and the dollar had been stable for the last 15 years. Then Bernutty mucked up the financial system and the SNB lifted the peg. Trillions of dollars in EM loans have become more expensive overnite and whole bunch of big banks have them on their books.
At some point, someone will figure this out. It will be a bad day to be in the market on that day. If you noticed I was predicting a new high in the S&P and a breakout in SIRI. For some reason the market seems to make one last new high before it rolls over. I guess we will find out if things have really changed or if the new normal was just an academic's mirage.
I have spent quite a bit of time discussing currencies and commodities recently and very little discussing SIRI. If you thought where is Duke going with all this, then you may get an answer today although you may be more confused than ever after reading this. On the other hand, if you want to understand why the market is gyrating in triple digits every day then you may want to slog through this.
Here is the cliff's notes version for you. The rapid shift in commodity prices and currency prices is causing money to be shifted into economies perceived to be stable or growing and away from those perceived to be weak. The weak economies then react by cutting the value of their currencies to increase exports which they hope will turn around their economy. Unfortunately, for the strong economies people who want to invest in it need to sell their weak currency and buy the strong currency. This just exacerbates the differences between the weak and strong currency. Ultimately, the strong currency gets too strong making exports too expensive so strong economy retaliates against the weak economy and we get a trade war. Insert Europe and Japan for weak economies and the US and China for strong economies (just in a relative sense) and you get the picture.
That is easy to understand.
What people don't understand is along the way there are winners and losers and those winners and losers are mucking up the interior plumbing of the banking system. Here is an example. All of you live in the US so when you want a mortgage you go to the bank and borrow dollars, earn dollars and pay back dollars. That is not the way it works in Europe. If you live in a non Euro country you can choose which currency to have your mortgage tied to. In Russia you can buy a house in rubles but pay back the loan in dollars. If you choose that option you got a lower interest rate. Turned out to be a dumb move since the ruble lost 50% against the dollar and your mortgage just doubled.
Every one knows the old rubric the more things change, the more they remain the same. If you happen to believe the rubric then you know we a headed to a bear market. If you believe that Bernutty and the other CBs have created a new normal so that old patterns will yield different results from the past then you a cockeyed optimist. If you don't have a clue what is going on in the market these days then you are in the majority and you probably sleep very well in your bliss. Notice I left out the word ignorant since choice three might be the correct state of mind in the short term.
Last week I wrote about the Swiss franc. If you remember there were too many people shorting the franc based on a guarantee of the SNB that they would prevent the franc from ever rising above 1.2 Euros. When the SNB let the franc float it (removed the peg) people had to cover at a loss and many lost everything. So armed with this new found knowledge everyone has a new brilliant FX play.
Did you know that there is another European nation that pegs it currency to the Euro? The country is Denmark and it pegs its currency, the Krone, at 7.46 Krones to the Euro. The DNB (Denmark National Bank) has vowed to keep the peg no matter how low the Euro should fall. This peg is a little different from the Swiss peg. The Swiss peg was three years old and was a construct of the SNB. The Danish has existed for 30 years, predates the Euro which came into existence in 1999 and is part of the law of Denmark which can't be changed by the DNB. Last week the DNB lowered interest rates from minus .05 to minus .20 on Monday and lowered them from minus .20 to minus .35 on Thursday. On Thursday and Fri. the DNB sold krone on the market to quell the demand for Krone. If you don't understand negative interest rates, here is the explanation. If you buy krone and hold them you lose money every year. So based on this are people buying krone or selling krone? The HF are all buying krone expecting the peg to be lifted. GL
You should have paid attention to The Duke when he told you the stock was setting up for a breakout. Maybe you will get another shot.
For years people looked to Dr Copper to discern what was happening in the manufacturing world. This week copper dropped 8% in one day and is now selling at prices that we haven't seen since the Great Recession. The drop in copper is mirrored in the drop in prices of iron ore, and other industrial metals. The apologists say it is a case of over supply. The reality is something quite different. Last summer I wrote a piece on fraudulent collateral at Chinese warehouse. Chinese manufactures use copper and iron ore as collateral for loans. I told you that the collateral had been pledged multiple times at multiple banks for loans. The fight over who owns the collateral is yet to be determined but banks aren't dumb. As the prices began to drop they reached agreements to sell the collateral before it became worthless. When they dumped the collateral it put pressure on the price of copper and iron ore. Margin calls went out to other manufactures and when they couldn't meet them because of slowing production in China the banks seized the collateral and dumped it on the market. The decline is now feeding on itself.
People are unsure what is going on in SIRI. It is building a base to breakout above $3.65. It should be obvious to everybody. The US is an island unto itself. The Fed has your back. The auto industry is in great condition. The ECB is about to announce QE. Sure credit is flashing a warning sign but what do the bond boys know? Everyone is still buying the dip. Everyone is on the same side of the trade so what could possibly go wrong?
We had a central bank saying they would do whatever it took to prevent the franc from rising above the peg and for three years plus they did just that. If you understood what was going on and a whole lot of smart people understood, there was a riskless FX trade. All you had to do was short the franc at the peg. Since you knew the SNB wouldn't let the franc rise above the peg you had no risk of loss. You merely had to wait for the franc to weaken some day so that it was worth less than the peg and you would collect your profit.
If you are looking for analogy in SIRI, go back to the collateral bond holders. They could short SIRI with impunity. If the stock went down, they covered with profit. If SIRI went up they collected their interest and converted the bonds to stock to cover their short.
Back to the FX trade. In the world of FX currencies don't move all that much so SEC and the boys allow a 50 to 1 leverage. That means if you have 20,000 in your account you can control a million in FX trades. Of course, since everyone is smart they are on the same side of the trade...short the franc. But remember they are all smart so the entire world has a stop loss order in to protect themselves.
So the SNB acts without warning to change the policy and does it at 3AM our time. The franc rockets through the peg, activates all the stop loss orders and chaos ensues. The trading system breaks down and no one knows what they paid to cover or if they covered. Most people in the trade had their equity wiped out and are on the hook for thousands (millions) more. A brokerage firm in England and one in NZ went BK since they had to cover their customers losses. FXCM located in the US almost went BK but was rescued by Jefferies. Interactive Brokers lost 120M. Everest Capital, a hedge fund in Miami lost the 830M and had its entire investor's capital wiped out. The carnage is just starting. Hedge funds do not have to publicly report and no one has had time to compute the derivative losses.
There are lessons to be learned from this week's action of the SNB. But to understand the lessons you first have to understand the trade. It was an exotic trade involving foreign exchange (FX) and so many people who invest in stocks have little understanding of what took place.
In the years before the Great Recession the Euro was the strong currency and the Swiss franc was the weak currency. But as the recession unfolded people started to worry about a breakup in the Euro and things did an about face. People began to sell Euro's and buy francs to deposit in Switzerland's banks because the Swiss banks and its currency were seen as a safe haven to survive the crisis. On the surface that seems fine but life is filled with unintended consequences. As people bought the franc and money flooded into the banks it pushed the value of the franc higher and the euro lower. This made Swiss exports and tourists visits more expensive and threatened to hurt manufacturing in the country. So the SNB came up with a brilliant plan in 2011. They would create a peg between the Euro and the franc so that franc never became more valuable than 1.20 euros.
To carry out this ingenious plan the SNB would print Swiss francs out of thin air, sell them and buy euros. In theory this should have depressed the price of the franc as it turned to toilet paper and the Euro should have gone up as the SNB bought billions of Euros. Good theory but the European economy has continued to decline so all the buying by the SNB failed to stem the decline in the Euro. This week Draghi will announce QE and that will lead to a further decline in the Euro so SNB would have had to buy a gazillion euros to maintain the peg.They finally gave up the ghost and said they would no longer support the peg. The franc went up 38% in the first hour and finished the week up 15%. So the SNB tried to intervene with market forces and failed. They tried to depress the price of the franc and failed, so why did people lose money?
We still have the ECB QE PROBABILITY. I think the SNB move signals that the market has pushed Draghi to action. If we get the sucker rally, it might become one of the shorts of the year.
Right now most people are oblivious to the problem. I can envision a Yellen proclamation to the world ala Bernutty in 2004 that we have the problem contained even as it continues to explode. The truth is that it is impossible to contain. You see to keep the metal moving the auto dealers have had to move down the subprime food chain. Back in 2011 most of subprime was A paper. But by 2014 that group was exhausted and most borrowers are B, C paper or worse, much worse. 2015 will be the year of D paper and next year will bring the implosion. It all works in an inevitable cycle except next year at this time you can impress all your friends and tell them you saw the whole thing unfolding in real time.
The finance people at the manufacturing level already see the problem and some execs at the Big 8 companies are already predicting a softer second half of the year. The statements are that 17M in unit sales are unlikely but 16.7M would be great. It is too early in the year to be talking flat sales at 16.5 or worse. There is always the possibility of QE 5 to save the system.
SIRI's prediction of 1.2M new sub adds for 2015 went unnoticed. The theory is that the company always low balls the numbers so there will be revisions higher in the future. The company has the perfect strategy to hide reality and if the implosion is put off a year and things stay good no one will comment about the increase later in the year. SOP they will say.
The problem for SIRI is that they remain tied to the OEMs and ultimately exposed to the subprime credit market. The payment delinquency issue is spreading and the implosion will come at a date to be determined .
Everyone will pretend that it was impossible to foresee. It is just the way the seven year credit cycle plays out with the assistance of the Fed.
So how bad is the problem you ask? Bad and getting worse quickly. 8.4% of borrowers who purchased an auto in Q1 of 2014 had missed a payment by December 1 of 2014. Let me reword that sentence for you. One in every 12 subprime buyers of an auto had defaulted on their loan within eight months of their purchase and subprime purchasers represent a third of all credit purchasers in the auto world. None of this was unexpected. Conns Inc. is the model for what happens in the subprime world. We saw it play out in the housing market and the same problem is showing up in the auto market.
The pattern is a consistent one that repeats itself every seven years ago fueled by a fed that lacks any institutional memory of the havoc they caused in the past. Back in 2009 we were coming out a banking crisis caused in part by banks making mortgage loans to subprime borrowers in the housing market. Every thing worked until lo and behold the sub prime borrowers failed to pay their mortgage. This came as a surprise to everyone on the planet.
So what happens next is pretty textbook. The Fed lowers interest rates and tells those IQ challenged bankers to toughen up credit standards. The bankers comply and the system is saved. But little by little the Fed decides that the recovery isn't moving fast enough so the it tells the bankers to loosen the standards just a little.The bankers do it and the economy improves again. By now you get the picture. Seven years into the cycle and any person with a pulse can get a loan because to deny even one loan could bring the whole economy crashing down. That where we are now and the 2005 housing market is now the 2014 auto market...a patient on subprime life support.
The oil crisis is hastening the auto credit bubble demise. JNK fell from a high at 41 to a low in the 37's although it has recovered some of the loss. Money to fund new junk bonds is drying up. The Fed noticed the growing subprime auto losses and is promising to take action...some day.
The big news for most SIRI investors was the announcement of fourth Q"s results which we predicted last Sunday. The only thing left for the CC is to find out if the great quarter will translate into an unexpected bump in in the EPS or whether the company invented another way to hold the EPS at 2 cents.
For The Duke the big news for SIRI was a small article that appeared in the WSJ at the end of the week. It revealed that the auto industry is beginning to feel the same problems that brought down Conn, Inc. I have written about Conn, Inc twice before but for those of you who are memory challenged on a Sunday morning here is a quick review.
Conn was a small chain of stores in the Southwest that sold furniture and appliances on credit to people with subprime credit. The chain did well for a number of years but in order to expand the store count and increase sales the company began targeting consumers with deep subprime credit. Specifically, they moved from people with A credit to those with B, C, and D credit scores (450 to 600) and encountered the expected results...and ever increasing number of buyers stopped paying and the credit arm of the company suffered losses that more than offset the profits on the sale side. At last count the stock had fallen from 80 to 17.
Since July I've been predicting that the same sort of problem would strike the auto industry and the article confirmed my prediction. According to the article 32% of all new car sales that are financed involve a subprime borrower. In order to make the deal work the buyer pays an interest rate in the mid to upper teens so that it can be attractive to the investor who buys the paper. To make it work for the purchaser the loan payments are spread out over 72 or 84 months. For the dealer, once the loan is sold he books the profit and laughs all the way to the bank.
It is all very simple until a few months later the buyer, who should have never gotten the loan in the first place, starts missing the payments.
The Fed and the ECB are into talking but what worked in the past is likely to fail in the future. Draghi and Bullship bluffed the market before but this time the market is likely to call the bluff and we shall see what cards Yellen and Draghi are holding.
The market is tracing out a pattern that is eerie similar to 2007. A few weeks ago I mentioned that a topping process in the market often takes weeks to several months as investors slowly come to the realization that not all is well in the economy despite what you may hear on CNBC. Back in 2007, Bernutty said the subprime contagion was confined. The market tanked in July of 2007 only to recover upon the statements from nutty. By October we had new highs and a pattern of slightly higher new highs. We had a similar drop in Sept. followed by a recovery in Dec. to a series of slightly higher new highs. In 2007 we had a sell off from the Oct. high, like we are getting now and then one new high before the big sell off. That would give us one more wave up over the next month before the pattern replicates 2007.
Everyone is celebrating lower gas prices but like Christmas bills the joy comes first and paying the piper is delayed. We are now seeing the fallout as oil service companies are getting clobbered. The active rig count goes down every week. A company providing housing to oil workers saw it stock decline 80%, sand companies (used in fracking) saw declines hit 60%. Revised capex expenditures are negative.
The dollar keeps setting new highs, another oil exporting country devalued it currency by 18% on 1/1. In my world things have already changed. Foreign exporters want their money delivered in dollars to two separate accounts, one official, one unofficial. I represent the Buyer. I get to see the wire transfer to confirm payment but the Seller provides the wiring instructions to a bank. Russia just forced their exporters to convert 50% of their accounts to rubles. What do you think is happening to world trade?
SIRI's failures are deeper than just controlling costs. Do you actually read any of the company's CC transcripts. They all sound the same. We added 375,000 new subs, FCF set a new record. EBITDA set a new record and we are ducking answering any questions on the latest new innovation because we are dumb enough to think that if we are evasive, YOU WILL BE DUMB ENOUGH TO THINK IT IS WORKING. Then they close the latest innovation, hispanic subs, women subs, AGERO ? and move onto another equally dumb idea. SIRI was a story stock and it will only go up when there is a new story. In the meantime, the fast money that follows story stocks, called momentum players, are out chasing a new story. SIRI is the old story.
Finally, there is the story that everyone has missed since no one can read a balance sheet. Let's take a look at Accounts Receivable over the last 4Q's starting with Q4 of 2013. Q4, 1.139B, Q1 2014 1.095B, Q2 1.054B and Q3 995M. The problem is that as subs go up AR should be trending UP, not DOWN. Got any idea what is going on? Here is the most likely explanation. SIRI is extending its paid promotional subs from 3 and 6 months to 6 and 12 months but not charging the auto companies anymore. Why do this. People don't cancel free subs and thus the company is distorting its churn numbers while management comes up with the next great idea. The question you should be asking, if you understood any of this, is why you think anything will change in 2015?
As I look at the market in general, I see the same lack of understanding on the part of investors. Everyone is still buying the dip, playing the same old strategy even though conditions have changed. As we rang in 2014 we had a coordinated CB strategy of providing stimulus to raise asset prices. It worked to the tune of 11.5%. But by the end of the year, the FED and BOE are sitting on the sidelines while the BOJ and China are left to do the heavy lifting.
So what about the investors who are making apologies for the poor stock performance? It is your money so feel free to do what you want and believe what you will. Of course, if you happen to believe in JM's manipulation theory I could ask why you are still in the stock...you can't find another stock that produced less than 1% return last year? I know, 2015 will be SIRI's breakout year and you don't want to miss it. The new stooge, Sam Lin said it, just like Wrongway said it last year...the dreams of $5.03 in March and the revised dream of over $4.00 after Q2. If you guys had any conscience you would have told Wrongway that JM was manipulating the stock. It had no chance of getting to $5.00, but no, you just let him make a fool of himself, which he did quite well.
So is there some rational reason why the stock hasn't gone anywhere? Let's start with a point that I made a couple of weeks ago. The Street's ESTIMATE for SIRI's EPS has been a 2 cents a quarter for 8 consecutive quarters. Part of this is slowing growth, sub growth was 2M in 2012, 1.6M in 2013 and 1.45M in 2014. But that really masks the real problem. SIRI was supposed to be a high fixed cost, low variable cost company. The theory was that it would take a big bunch of capex expenditure to get this off the ground but once it was profitable there would be very little incremental cost so top line revenue would fall to the bottom line. Good theory. In 2012 SIRI had 3.4B in revenue and a 125M in profit per Q. This year it will have 4.2B in revenue but a similar quarterly profit. The problem is that management can't control costs so little of the additional revenue finds its way to the bottom line.
But what about the 3 estimate in Q1 of 2015. Just an engineering gimmick. SIRI will buy back enough shares so the $130M profit when divided by the lower share count will produce a .0254 profit per share which will be rounded up to 3 cents. You need to pray it fools some suckers.
It is over. The results for 2014 are official. The S & P grew 11.4% while SIRI was up 0.29% and that was only achieved by a last minute hail mary pass. The apologists are out in force. The stock is manipulated or I bought at 12 cents so I'm still ahead of the game are the favorite retorts.
As usual, we have a new stooge over at SA predicting SIRI is going to 4.36 this year and Cracked Nuts writing letters to Santa asking for favors that never seem to appear for the company. I asked CN to explain why the price hadn't gone up but got his usual evasion rather than a meaningful response. So I decided to answer the question myself.
The ultimate answer is that there is failure of understanding at all levels, stockholders and management. Let's start with the favorite topic on the board--manipulation. So is the stock being manipulated? I will give you a firm MAYBE, but not in the way you think it is being manipulated. The current manipulation story, there is an ever evolving one on the board, is that JM or one of his proxies is selling when the stock goes up and is holding the price down. Great conspiracy theory but if it was true, he would be violating a dozen security's laws. You are dumb if you pay any attention to this #$%$ because it just some guy reaching for supernatural answer for a subject that he doesn't understand.
So what about manipulation? I will give you two subtle arguments. First, the January $3.68 bid showed that the majority owner thought that was a fair price for SIRI so why pay more? This was probably an answer for six months. But second answer is probably closer to the truth. JM selects the BOD and indirectly selects the officers and the current crew seems incapable of articulating a view a coherent view of the future. If you want to argue that this failure of management is manipulating the price and artificially holding it down, then I agree.
We also saw Nigeria institute currency controls so that their citizens and investors couldn't sell their currency, convert it to dollars and protect their assets. On the other end of the spectrum, the Swiss National Bank did just the opposite by saying they would sell their currency to depress the price so that it doesn't get overvalued.
So you are probably saying, I'm lost. How does this affect us and the US stock market. First, most of the debt of the EM is held by European Banks. That means when the defaults occur it will weaken their system. Unfortunately, since our banks have counterparty risk with European banks on a daily basis, if they get sick we get sick. Secondly, anyone with half a brain is trying to get their funds out of EM and the easiest way to launder the money is through an international bank that will convert it to dollars and then stick it in our market in the hopes that the local authorities won't figure it out. Hence the explosion in our market last week and the Duke's call of 2175.
So what is the bottom line in all of this. First the dollar is going up because it is being used to launder funds from the EM. Ultimately, this will make our exports too expensive and lead to lay offs in our manufacturing sector. World wide we are seeing a trillion dollars in capex in the oil and gas industry being cancelled so these two items should depress world wide GDP.
Secondly, the world is investing in our market as a safe haven for laundered funds. This has nothing to do with fundamentals of our companies. At some point this hot money will seek a new home and the selling will beget new selling.
Finally, the debt in the EM, both private and sovereign is likely to see increasing default. No one really knows who holds it because of derivatives but a 2007 banking crisis is a possibility. So how does it all turn out? Even I'm not sure. But one thing I do know is that the world doesn't see any of this coming and that is never a good thing.
So let's be clear precisely clear what the problem is so that you can watch the potential train wreck unfold. Most of the emerging markets had their currencies and/or their sovereign debt tied to commodities. As the market for commodities crashed it has become harder for investors in those countries to meet their debt obligations. What exacerbated the problem is that most DEBT IN THE WORLD BY LARGE COMPANIES IS DOLLAR DENOMINATED. That means it has to be repaid in dollars to its lenders. So people who invested in EM and got paid in a local currency have something that is worth less each day as their currency falls in value yet their debt is going up because they have to convert their depreciating currency into dollars to pay off their debt. What is even worse is that each month in order to pay their debt they sell their own currency which exacerbates the local currency's fall and they buy dollars making our currency stronger. It only exacerbates the problem on both ends.
Everyone watched the ruble stabilize this week and it helped the market rally. The only reason is that few people understood why the ruble rallied. First a number of exchanges that permit trading the dollar ruble pair announced that on TU they were closing trading of that pair. This caused traders like The Duke to close his short position because the exchange was going to close it for you. Sort of a margin call in reverse. Then on WED, the Chinese stepped in to support the ruble and Russia gets to live happily ever after. Except,of course, when they import products and find out every thing has doubled in price.
So we have the illusion that everything is fixed. What no one noticed is what was happening in the rest of the EM. The following countries saw massive declines in their currency last week. Brazil, Ukraine, Venezuela, South Africa, Indonesia, Hungary, Poland, Bulgaria, Romania, Iceland, Turkey and Columbia.
The Dow rallied 740 points in three days. The S&P is within a few points of its all time high. Santa has arrived just in time and people believe the problems are behind us. Last week I made a few points. The world was being flooded by Saudi oil that was aimed at crippling Russia. The oil glut would get worse. The EM markets would be hurt by currency problems and finally that our market would soar to new all time highs as funds from EM found a new home in our stock market. On Monday you awoke to a currency crisis in Russia that saw the ruble fall 33% in two days before it stabilized and the market soar by the end of the week. During the week Bloomberg ran a story that oil production will soar in 2015 in this country. New projects are being shelved but old projects already have paid for their sunk costs so producers are going to operate 24/7 to get the oil that will pay off their bonds. It almost looks like The Duke knew what he was talking about last week but then again, you would all remind me that everyone gets it right every once in a while.
With Christmas just four days away, it is nice to know that the world's problem have been fixed and we can all sleep safely. The only problem with that thesis is that the contagion is spreading. It is just that people don't see it and don't understand it.
Remember when bad news was good for the market. Today's soaring dollar and stock market highs are perceived as good. Who could complain? The only problem is that they represent a problem in the world's financial system.
So The Duke expects a rally. If you read me closely last week and stopped accusing me of doom and gloom you would have seen my prediction of 2175. That is because all the world's money will find it's way into our market. The only problem is that investor's perspective is changing. A few months ago everyone believed that CB had their backs. Bad news was good news, good news was good news, no news was good news. Every CB was stimulating. Today some CB are stimulating, Japan and Norway, others are doing nothing, the Fed and BOE and some are tightening, Russia and China.
The drop in oil is inherently DEFLATIONARY and the drop is so profound that only an immediate QE program by the fed can stem the tide. I don't see that happening. That means the dollar rises, oil production rises as producers raise production to compensate for lower revenue. Unfortunately, it also means that some people use the impending stock market increase to deleverage assets. This will put further pressure on junk bonds and ultimately the market for subprime loans will close. It also means the entire market is in for a deep correction, not just SIRI. If you recognize this scenario it is because it played out in the late 20's. Oil prices collapsed before the crash.
Anyway, the good news is that perceptions take weeks to months to change and the AAII sentiment index is still bullish. This means there will still be people buying the dip tomorrow. WW? Maybe the market will see things differently than I do. Then again, if they see it the way I do, the question is will there be any buyers there next month?
Conn reported a loss this Q and dropped 40% in one day. Did anyone get the Duke nugget that their was still time to short it?
Everything in the middle east is complex so assigning simplistic explanations to the situation is a recipe for disaster which means I'm about to do just that. If you look at the Syrian civil war from the Saudi's perspective and forget about Sunni vs Shia, the Saudi's favor building a pipeline through Syria and Turkey to deliver natural gas to Europe. This would effectively isolate Russia and provide Europe with a friendly gas supplier in the future. Russia supports Assad becomes he refuses to permit the pipeline to be built. Hence civil war. It s always about the money, not the religion.
So why is all this important? It has a profound impact on our market and now we get to speculate on what that impact will be. If you read the oil traders of the world, the optimists are telling you that we are near the bottom and oil is about to rally at any minute. A dead cat bounce, maybe, but nothing sustainable. A view of 1973/74 shows you the Saudi's are long range planners and they are willing to see this through over months if not years. Oil is usually hedged out for six months to a year under futures contracts so any experienced driller is safe over the next few months. New projects will be shelved because this will pass and oil will be sold at higher prices in 2016. You just need to survive.
Currencies in oil producing countries will continue to get hammered. The ruble lost another 10% this week and Russia's attempt to stem the tide by raising interest rates was an utter failure. Of course, that was the point of this whole exercise. Other oil currencies also got hammered, the Norwegian krone, the Venezuelan Bolivar and the #$%$ia #$%$ to name a few. People are fearful that the junk bonds floated by shale oil operators will never be repaid so they sold them. JNK and HYG recorded new 52 week lows and new issues were pulled be
cause the market has dried up. People sold stocks in the EM, sold EM currencies and bought dollars and this should lead to a rally in our market.