The Sky is Falling— 2008. Again.

We are at the brink of financial disaster and nobody on mainstream media is reporting it. Nobody in finance media are reporting is (save ZeroHedge, maybe). All the banks and global institutions deny it. But boy,  is it coming.

2008: Redux

We all know of the 2008 crisis, the event to destroy the global economic system as we know it. Ben Bernanke called it a crisis greater than the great depression and the some of the longest standing financial institutions had to close their doors when it came falling down.

The 2008 event was a crisis created by a web of factors but there are some primary causes for what happened. While the banks were of course bundling together mortgage backed securities and peddling mortgages to people who clearly could not afford it, the real danger came from how exposed banks were to one another. In the modern world, governments, businesses, and financial institutions are leveraged out the fucking ass. 

Now, I’m not against businesses and governments taking loans in order to create growth, that’s a healthy part of any economy. What becomes unhealthy is when we have so many loans to one another that if one person topples over we see a domino effect of rolling defaults from more people suddenly becoming unable to pay their interest. This very thing happened in 2008 with the subprime mortgage crisis when regular home owners could not afford their mortgages any longer, and when banks began to collapse from devaluation of assets and losing revenues streams.

So what could take us to a second round of a 2008 type financial crisis? Simple.Risk exposure once again to one another, and risk exposure to the energy industry.

Consider the following. In 2008 we had $295.185 billion in write downs of loans, MBS, and CDOs from the subprime mortgage crisis. $144.676 billion of those were from American banks. For bankrupty risk in 2016  alone, we have more than $150 billion of debt stemming from only energy companies. Of which ZeroHedge estimates that creditors may only get 15 cents back on the dollar through asset liquidation. That’s a whopping $127.5 billion in unsecured debt from ONLY American energy companies at risk of default in 2016. This is only the tip when it comes to the risk we’re at, but let’s focus on one systemic risk at a time.

20160216_energy risk

total energy filings

bankruptciy recovery.jpg
Enter 2016. 
We’re on the countdown to ground zero once again. 

State of the Game: Market Situation

Before we continue on to discuss more about oil, let’s have a quick look at the current situation in the market.

Now, I also know what a lot of people are saying out there. We’re in a fantastic bull rally with the bottom of oil found! You’re an absolute idiot for not buying while we’re at the bottom :^) 

If only markets were so simple.

To start things off simply, the charts below should explain to you 90% of what you need to know.

The S&P 500 and by extension the entire market is overvalued as hell.S&P Correction

EBITDA vs S&P 500bond-chart.png

Global Liquidity20160309_liquidty2

Baltic Dry Indexbdi_log.gif

As it’s plainly obvious, there’s a tremendous discrepancy between earnings and GDP growth and the value of the market. Not to mention global trade has utterly collapsed despite commodities being at an all time bargain bin price and liquidity is down to pre-pants-shitting-crisis levels.

This unprecedented bull market rally that we’ve been in since 2011 has been nothing but a creation through quantitative easing. S&P QE

So given these charts, we know a few things. The global financial system is on shaky legs and has been for a long time. We’ve been accumulating tinder beneath our feet for the last half a decade and we’ve been waiting for the spark to set it off. That spark is now oil.

Default Risk in Oil

So, let’s get back to oil. I mentioned the default risk in 2016, now let’s have a look at that. Deloitte warns that “The roughly 175 companies at risk of bankruptcy have more than $150 billion in debt”. Not to mention there are still over 60 companies that are negative cash flow accounting for $325 billion of debt. 

So where does that leave us? Well, bringing this back to the 2008 crisis, banks began to collapse because of risk exposure to one another and asset devaluation. But get this, since 2008 among the 25 largest banks, exposure to derivatives have gone from $184 TRILLION in 2008 to $247 TRILLION in 2015. That’s a whopping 34% of growth since 2008.

Why is this a problem? Because these banks are all betting on continued future growth, as these financial institutions grow in exposure to one another and increase their exposure to future downturn, we can easily fall into another crisis as soon as some part of the system pops. Right now, that risk is coming from oil.

Energy risk FT.JPG

A number of OPEC nations face bankruptcy risk and a ton of American energy companies face the same. Citigroup has revealed that it had recorded at 32% rise in non-performing corporate loans primarily from the energy sector, and Wells Fargo reports that net charges increased to $831M in Q4 up from $731M in Q3. Also mainly from energy sector. Banks are in a situation where they must actively hedge their risk against the oil sector at ALL costs in order to avoid the current dangers from rolling bankruptcies. This also comes in the form of market manipulation but I’ll talk about that at a later time.

Market Conditions in Oil

But anyways, given the frail state of the energy sector, how much of a risk are we currently in? Oil is going back up and rebounding after all. We should be seeing $50-60 oil again in no time.

Not quite.

The price of oil is an interesting little game at the moment. From my personal speculation, I think that the market is being highly manipulated as seen by the tremendous and sustained divergence from market fundamentals. But I’ll get to that in a moment.

The biggest thing against the case of rising oil is basic supply and demand. As it stands, global oil supply is in a glut of 2 million barrels per day with stockpiles building globally. Global supply stocks stand at 3 billion barrels (in comparison, global demand is approximately 30 billion annually). However, the major focus when it comes to supply should be shifted towards the United States.

PADD_Map

America divides the nation across various zones of petroleum administration. The primary zones to note are PADD 2 and PADD 3. The majority of refineries are located in PADD 3 (~49%) whereas the majority of distribution stems from PADD 2 which is capable of supplying 85% of consumer demand. In terms of storage and distribution, PADD 2 and by extension PADD 3 are the breaking point indicator.

So let’s have a look.

genscape production

genscape 1

As we currently stand with Cushing at 66.95 million barrels (~80% capacity) in storage Cushing is already turning away lower grades of crude and are actively piping oil down to PADD 3 for storage. Genscape reports that Cushing only has a 4-5 months of storage remaining unless this glut goes away.

cushing storage PADD 3 is also at high capacities at 58% capacity as of Feb 19th down from the all time high of 62% due to storage expansion. In fact, the glut is getting so bad that people are beginning to turn to rail tank cars to store oil. I shit you not.

What matters here is the divergence between oil price and oil glut. As seen from any indicator or study, the oil glut is not going away— it’s getting larger. While we aren’t at the breaking point just yet, we are rapidly approaching it. The increase in bullish speculation in the oil market is dangerous and a divergence the market fundamentals. Be wary of any rally until the market fundamentals have shifted, as we stand the conditions have not yet improved. 

oil rally.png

When zoomed out a little..oil rally2

Systemic Failure

So in a long and roundabout way, where does this end up leaving us? At a potential brink of a massive asset write down from the banks and a series of domino-ing debt defaults. The issue with the 2008 crisis was due to the number of poor loans that were being issued out, this round, it’s the size of the bad loans being lent out. While I don’t know if we have anything like significant credit default swaps that will add onto costs of defaulting loans, I do know however know that the cost of the cheap oil can be just as significant.

If we look beyond American institutions however, the risk extends far greater. With oil dependent nations budgeting based on continued oil revenue, we see even greater systemic risk of national loan defaults with nations like Russia, Brazil, Nigeria, and Venezuela looking to be prime candidates for further recession.

As credit becomes increasingly available and as nations become increasingly dependent on debt to balance their budgets, if a significant enough piece of the puzzle crumbles under cheap oil, we could see more potential of global recession.


 

The global economy is in a sorry state, with recessionary indicators flaring up globally. We’ve been living in an era of false economic growth created through economic stimulus, and we may be on the cusp of a very significant credit down cycle.

For all the bulls out there, you can only defy fundamentals for so long. 

 

Oil Prediction Lessons – Wrong but not Quite

Status Update:

  • DWTI short @ $305 covered at $295
  • UWTI @ $1.376 sold at $1.56
  • DWTI buy @ $262 average target: $390

I’m a little bit pissed at the result of this. My prediction was right initially (and also wrong the day after), and I ended up selling before it came to fruition.

USOIL123

On Tuesday pre-market the oil price rose like a crazy mother fucker in the highlighted red channel. Unfortunately, oil prices dipped as a result of the OPEC deal being less of a deal than anticipated. As a result, I ended up selling my UWTI shares at a paltry average of $1.56. Unfortunate for me however, afterwards the Iran oil minister came out with the statement that he would welcome a fucking freeze in production without implying he would freeze Iran’s output. For some retarded reason, the market decided that this was good news and decided to pop up the oil price.

Fucking stupid.

The issue right now with the market is that the entire market is in such a fragile state that any sign of positive news will set off a small rally. The market is sitting at the cliff before a massive crash so any news no matter how small will trigger a rally to get us off the bottom.

Unfortunate for the market, the crash is not a matter of if– it’s a matter of when. SPX Crash

I currently own 45 shares of DWTI at an average price of $262 with a sell target of $390-400. Let’s make it rain in the coming week. I’m expecting one more bounce to 32 with the coming contract rollover follow by a steep decline down to the $25-27 range.

Feb 15, 2015 – Called it.

Status Update: 

  • USOIL @ $30.81.
  • Expecting a 50% gain off of previous week’s purchases.

Called it. Oil is on the rebound up towards the 32 mark, a bit higher than I expected. There’s going to be an OPEC meeting on Tuesday for OPEC and non-OPEC producers to discuss oil production.

My project is that oil is going to rise significantly off this— as high as $34 this week but not before facing significant resistance at the $32 mark. If oil can successfully break the $32 mark and the news is positive, it isn’t unrealistic to expect oil to be up for the next week or two until the realities of maximum capacity and Iran come crashing down.

Oil on the rise. Be careful about the rise, the fundamentals have not changed. USOIL1The biggest thing about the oil situation is that we are still in a classic game theory situation and it is not a smart outcome for ANY nation to cut production unless a production cut can be enforceable.

Saudi Arabia and OPEC tried to increase price with production cuts in the past and they ended up getting burned. This is how we had oil in the teens before price recovery in the 80’s.

If we evaluate this in terms of a decision criteria:

  1. Single nation decides to cut oil production
    • Result: 
      • Loses out on market share and revenues
      • Individually too small to impact prices
  2. OPEC nations decide to cut oil production
    • Result:
      • Non-OPEC nations incentivised to produce more oil and capture more market and revenue
      • OPEC nations that do agree incentivised to cheat and produce more oil to capture market share and revenue of nations that cut production
      • Nations that cut lose market share and revenues
  3. OPEC and Non-OPEC nations decide to cut oil production
    • Result:
      • Same shit as above. It’s a bad idea to cut production no matter how you look at it. 

As long as there is less cost associated with producing oil than there is associated with not producing oil, nations will continue to pump the fuck out of the ground.

Nobody will cut production,  it is illogical and a bad decision unless it is 100% enforceable.

February 12, 2015 – 2244% to go

STATUS UPDATE:

  • DWTI short 10 @ $395, cover @ $295
  • DWTI short 5 @ $305
  • UWTI buy: 1500 @ $1.36, 500 @ $1.28, 1250 @ $1.43. Target exit at $1.80-2.20

Between today and yesterday, it’s been pretty good. We saw the bottom of oil at $26.20 with a rebound based off of OPEC rumours– again. This is great for me as the market is still behaving within my expectations. Though, I must admit that I did fuck up a little.

Making orders and large money decisions at 6:30-7:30am is a bad idea. I didn’t lose any money, but I lost potential money. Where I could have executed a short at $420, in my groggy state of mind I executed it at $395 instead. Still a great deal, but not an amazing deal.

Similarly, I bought in on UWTI at $1.36 instead of buying in at $1.10 where I would have an amazing deal.

So instead of getting amazing returns, I’m getting good returns. I’m not terribly peeved since I’m making money, but I do kick myself for not making the smartest decisions.

Looking at the market, I believe now that it is not a good idea to buy in the early hours of the morning unless I have pre-determined a calculated buy and sell point. The market is shaky as fuck in the morning and unless I can be fully awake to make a call that doesn’t involve me lying in bedI shouldn’t do it.

Deciding in the afternoon is probably better since the market is stabilized after the majority of day traders are on lunch, and when I can be awake enough to not be stupid.

USOILchart3

As for next week, we are entering a long weekend in the markets with Monday being President’s Day. Unfortunately, this gives me a huge window where I will not be able to take action. Fortunately for me, I am also quite confident about my position.

The major players are acting with CNBC broadcasting a blatant manipulation with the OPEC production cut (curiously time exactly when the market is at the ABSOLUTE bottom), and similarly a LOT of large buys are being executed on UWTI and USOIL. Why play against the big boys when you can play with them?

I’m expecting USOIL to take a small dip into Tuesday when it begins to rebound on Wednesday through Friday. I will be planning to add some additional DWTI shorts hopefully around $330 on expectation that DWTI will dip down to $200-230.

USOILchart4

I hope I’m right!

Alternatively, be careful for the SPY. Anything below that red line is in 20-30% correction warning zone to 1500-1600. I am calling a US market crash by the end of next week or by Tuesday the week after. 

Get ready for a crash boys– it’s all downhill from here.
SPYchart1

 

 

February 10, 2016 –2334% to go

STATUS UPDATE:

  • Closed 20 DWTI @~$286 average buy price, ~$387 average sell price.
  • In on 1500 UWTI @ ~$1.36 average price. Targeting $1.50-1.60 exit.

So, here is the first real post on the blog. It’s embarrassing to say, but I closed my first properly timed and major win– it was fantastic.

With closing out at an approximately $387 exist and $286 entry, I made about 35% in returns on an all in trade that consumed all my available liquidity. Margin included.

As a college student not even out of school (albeit currently working), I must say that the money is pretty great, though I realize that it still isn’t enough money to let me splurge. Just enough to contribute a dent into my student loans and buy my friends and parents a meal.

On to the next move though. At the time of writing, USOIL has dipped from the ~$27.60 price point where I bought UWTI and has dropped down to $27.02 with lows into $26.80. I anticipate that USOIL will be bouncing off this low up to ~$28-29 range before dipping again into new lows.

USOILchart1

I wish I could provide a more concrete rationale to this idea but my primary reason comes from how USOIL has been dipping for so many days in a row. Coming from a recent peak of $33-34, I wouldn’t expect that it will continue to free downwards. Downward momentum is not nearly as strong as the previous day where it dropped continuously from $30 down to $27.5  as there have been numerous up and down swings throughout.

I suspect that we’ll be subject to a short squeeze soon and that oil will be rising back up. Similarly, the MACD an Stoch RSI on the 1 and 2 hour chart indicate that we are due for a quick rebound, though longer term trends indicate that oil will continue downwards for some time.

USOILchart2

As for the bottom of oil, it may be some ways to go. US storage facilities are about to reach maximum storage capacity at which point oil will be forced to sell at significantly discounted rates. Similarly, Iran is still increasing output which should increase downward pressure for some time.

A secondary downward pressure may also come from Iran and Saudi Arabia contesting for market share through a price war though I am sure both parties understand that this is not a sustainable move to engage in.

All in all, the bottom of oil will likely not arrive until we have passed maintenance season and until Iran is able to maximize their output capacity.

 

Introduction – 2500% Returns in One Year

Note: This is an older draft I’m deciding to complete as my intro– from January 25th, 2015


 

Status Update: Down on YANG, down on UWTI, hopeful but gambling on DWTI 5@$352 overnight.

January 25th, 2016: -3%


 

I’ve been working on this goal for some time (<1 month), but I figure it’d also be fun to blog as I go through my journey.

This blog is dedicated to my 1 year goal to make $100,000 CAD in one year of stock trading. The stretch goal is to do $100,000 USD but baby steps– I only need to achieve 2500% returns in order to do it.

To put this into perspective, I am trying to multiply my trading sum 25x over. Most people are happy if their investment portfolios net them 5% YoY with the help of their financial advisor. To achieve my goal, I will need to compound a 5% growth 66 times in 52 weeks. We’re talking achieving one of those tiny 5% YoY every 5.5 days of the fucking year.

Is this goal possible? Yes. Is this goal plausible? No. But fuck it, let’s do it.

Why am I doing this? A few reasons.

I enjoy studying financial markets in my spare time, I enjoy reading geopolitics, and especially China. Why not put my knowledge to the test and try the market?

Secondly, I can afford to lose some money, what I can’t afford to lose is on the opportunity cost. I’m young, I’m in the beginning of my career, and I have enough liquidity to burn $2000.

Anyways, let’s get this going. %2500 in one year.