Crude Awakening28 January 2016
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Oil Redux
Scenario Update: Crude Awakening
Crude Awakening
HiddenLevers
MARKET UPDATE
Market Update
sources: HiddenLevers, Forbes, Zerohedge, Guardian, Atlantic, Wikipedia
1
ZimbabweChina Colony
2
3
Obamacare worries
mount
Finance Industry in Limelight
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 QEECB + China
too early or
too late?
Still no 2016 Fed Stress
Tests
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
HiddenLevers
OIL REDUX
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
?
Oil Redux: Max Draw Down Comparisons
sources: HiddenLevers
Current Oil correction is in line with 1980 and 2008 crashes.
-76%
-71%
-70%
-55% -55%
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?
Oil Redux: Equity / Oil Correlation
sources: HiddenLevers
YearOil
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
Oil Redux: Energy Sector Impact
source: HiddenLevers
Upstream:Need for cash = pumping all-outMany firms will pump into the teens (eg FCX @ $16/barrel cash cost)Many firms’ shares down 90%
Downstream:Refiners’ profits up on cheap oilRetailers’ profits up on cheap gasRefiner ETF has ½ downside of S&P
Midstream:MLPs hit by lack of future growthMany MLPs are overleveragedMLP ETFs down 50%
-90%
-50%
+5%
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 PEOPLEEMPLOYED
Cheaper oil=PAYROLLSINCREASE
Cheaper oil=MORE SPENDING
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
Oil Redux: Investment PostureOpportunities 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!
HiddenLevers
SCENARIOS: CRUDE AWAKENING
Scenario Update – Many in Play
Oil CrashGoodBounce
Back
BadIsolated
Crash
UglyPerfect 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 2015WAR ROOM
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 2015WAR ROOM
UGLY: China Recession
triple bubble pop
source: HiddenLevers, Economist, ZeroHedge,
seismic economic changes
China posts negative GDP as a consumer nation
govt actionsfar exceed US
in 2008
China is world’s #2 consumer
government caught lying
drags down commodities
producers
July 2015WAR ROOM
BAD: Tech Reality Check
some unicorns
die
Nasdaq stops outpacing S+P
source: HiddenLevers
SF property market
correction
normalizing P/E ratios
1y returnSPX +12Nasdaq +23
May 2015WAR ROOM
UGLY: Dot Com Déjà Vu
more muted than 2000
crash
source: HiddenLevers
valuations questioned across tech
Fed may restart QE
Unicorns crashing spooks NasdaqSPX less
damaged, a la 2000
AAPL GOOG take a hit
May 2015WAR ROOM
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%
Crude Awakening – Take Aways
Russia is primarydefault 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
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