The not so great white north

You know that you're in bad shape when your offer to decamp to the spare room is met with a "if you don't, I will" response.  Such is the early going in 2016 for Macro Man and Macro Boy the Elder, and if readers are already bored by your author moaning about how bad he feels, please trust him that he's even more bored of providing fodder for the complaints.

Given that it's a new year, Macro Man thought that he'd re-run his equity screener to see if any fresh developments had emerged.  As it turns out, the answer is "not really."  It still loves European equities and still hates Brazil.    Plus ca change....  Macro Man was intrigued to note, however, that Canadian equities got the lowest rating in the developed market cohort despite the putative comparative advantage offered by the weak Canadian dollar.....


Of course, how weak you think the Canadian dollar might be depends a lot upon your perspective.  For a skier choosing between France, Switzerland, Colorado, or the Canadian Rockies, clearly the latter offers a comparative price advantage, rendering the CAD dirt-cheap.  For those of us with plenty of gray hair, on the other hand, who can recall the secular dollar bull market of the late 1990's, current CAD valuations are far from outstandingly cheap.  After all, USD/CAD spent five and a half years (1998-2003) above current levels.  Perhaps coincidentally (or not!) that beginning of that period also coincided with a fierce downdraft in energy prices.

For fun, Macro Man ran a little regression model on USD/CAD using just two independent variables: the oil price, and the spread in 2y2y swap rates between the US and Canada.  He used the entire 20 year history as the in-sample period, as he's not trying to build a super-robust trading model here, but rather trying to get a general sense of the level of CAD over/under valuation.

As you'd expect with such a large window and so few variables, there are occasionally periods of large deviations between the model and the spot rate.   Overall, however, the model works pretty well, with an r-squared of 0.83 (though admittedly this is regressing levels rather than changes.)

What's particularly interesting to note is that over the last year or so, these two factors (oil and rate differentials):

a) basically explain all of the price action in USD/CAD
b) suggest current CAD valuations are pretty fair.


Obviously, a more robust model would look at something like a dynamically-weighted CAD export price index, which would probably improve the performance over the first 10 years of the study.

So while selling the chalet in Verbier to buy the ski lodge in Whistler may indeed be an excellent trade  (though surely one needs to hedonically adjust for travel?), Macro Man is hard pressed to see that USD/CAD is yet a fade as an FX punter.   To make that call, you essentially have to believe that oil will sustainably bounce or that the US rate premium over Canada (which already drastically undersells the amount of Fed tightening vis-a-vis the dot plot) has way too much Fed baked into cake.

For now, Macro Man isn't willing to put his name (or his money) behind either one of those propositions.
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Nico G
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January 6, 2016 at 3:27 AM ×

boom boom there goes the yuan

globex spoos a stop festival

dipsters, hipsters, same same lack of bravado, they both jump in a fabricated trend too late

make a bottom call now instead of pretending you were in the right trend since that dip you were too scared to see

this is the worst week one in ages, many tactical longs implemented yesterday have been stopped under 1992

just bought spoos 1989 stoprun with a 10 point stop

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Anonymous
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January 6, 2016 at 7:32 AM ×

nice post MM, i did something similar when i read Nico G's rationale for fading $cad here and arrived at a similar conclusion. It would be a big worry if one puts a "substantial" amount of money on the line because skiing in the rockies feel so much cheaper? and then to be comfortable in doubling that up a couple of points higher too. But then again what does an amatuer like me know?

- izman -

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amplitudeinthehouse
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January 6, 2016 at 9:04 AM ×

", please trust him that he's even more bored of providing fodder for the complaints."

Oh yes, Macro Man..this absurdity of a market has to come to a stop or everyone ends up with the same result as those synthetic consolidated swap spreads being traded around the prop desks in Manhattan..nothing. Sorry, you will be left with bragging rights. Please, leave a poor mug alone.

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Booger
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January 6, 2016 at 9:56 AM ×

MM, I tend to agree that USD.CAD is at about the right level given where oil and interest rate differentials are.

By my ready reckoner (guestimate) AUD.USD should be around 0.68 given resource prices and interest rate differentials so it should be crackling when it breaks.

AUD.CAD I think has a great risk:reward potential.

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Leftback
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January 6, 2016 at 11:47 AM ×

LB is smiling at the overnight action, lower oil, rates and USDJPY all being part of the picture we painted for January. But to cap it all off, there is something even better on the near-term horizon: it looks like we are actually going to make some money today!!

Shanghai market may have bounced last night but the real story is being told by the weakness in CNY, AUD and stronger JPY. US10s have broken through the 2.20% level at last, now we may really see a painful squeeze develop.

It is obviously going to be a very ugly day in energy, emerging markets, miners and US high yield. Say no more, squire.

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Leftback
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January 6, 2016 at 11:57 AM ×

Btw, MM, everyone here at Hammock Capital would like to wish you a speedy recovery and lots of lemon-honey-ginger drinks. We are sure you'll survive a couple of days coughing in the spare room... "absence makes the heart grow fonder" and all that...

Has anyone seen Funny Money this morning? I hope all our favorite dip buyers and carry traders are in one piece today. We did a bit of chart work on USDJPY yesterday, and if USDJPY 118 doesn't hold today it could be very ugly, "look away, look away".....

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TontoToronto
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January 6, 2016 at 12:14 PM ×

Couldnt agree wih you more MM. Short the Loonie, TSX and CDN rates...the perfect trifecta.

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Anonymous
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January 6, 2016 at 12:33 PM ×

Check out NEMO. The Bank of Canada's exchange rate model.

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Jim
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January 6, 2016 at 12:39 PM ×

I know this is blasphemy on this blog...the guy is really bragging.

"What The Fed did, and I was part of it, was front-loaded an enormous rally market rally in order to create a wealth effect"
Richard Fisher

The market is a public utility.

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Ghost Of FunnyMoney
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January 6, 2016 at 12:54 PM ×

LB - FunnyMoney hasn't posted here in quite some time (I know because I work with him). I can tell you he hasn't been long equities in 2016 though. Fwiw, looking above, Nico is long the spoo (and those two are usually on the opposite sides of each other's trades).
Good luck.

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Leftback
admin
January 6, 2016 at 12:55 PM ×

NEMO. Not the blogger but a creation of the Bank of Canada PhDs.

NEMO

$35 level seems to have gone for a Burton in $wtic, Brent hanging in at $35.20 for now. Those levels and USDJPY are probably the key metrics to keep an eye on today. Now for ADP which EVERYONE knows will be a cheery 220K or so. Right?

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Bruce in Tennessee
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January 6, 2016 at 1:12 PM ×



Beginning a position in SDS today, as the 17k level looks to be history. Certainly I've learned that since 2008 this is just silly behavior! Inflection point? We'll see...







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Anonymous
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January 6, 2016 at 1:24 PM ×

@Jim..
"What The Fed did, and I was part of it, was front-loaded an enormous rally market rally in order to create a wealth effect"
Richard Fisher.
At the back of savers and people on fixed income the world over.
Shame, shame..no corruption in the U.S....

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Anonymous
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January 6, 2016 at 1:26 PM ×

http://www.bbc.com/news/world-europe-35231046

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Leftback
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January 6, 2016 at 1:31 PM ×

ADP posted +257k and US10y barely budged. US data clearly not the central story today, let's stay focused on crude and FX as the morning progresses.

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washedup
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January 6, 2016 at 1:42 PM ×

Left - not to rain on the parade, but I re-iterate my point that long end price action (referencing TLT) is downright stinky considering the mauling risky assets are getting - given that, I frankly can't figure out where the dollar inflows are going, but its useless to make sense of every price move I suppose.

Nico - great call(s) on shorting equities end of year - when this drubbing is complete I may nibble on some EM equities - they are getting more and more undervalued relative to US equities (with good reason, admittedly) and at some point a countertrend snapback is all but assured.

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CV
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January 6, 2016 at 2:41 PM ×

Don't panic ... yet! Don't front-run the front runners. I think range-bound and sector/country rotation is still game as per usual late cycle before the deluge.

But but ... no need to be a hero either. LB is absolutely right (I think at least) in the point about FX and crude. Punters looking to decent macro data, and the "non-threat" of the Fed in justifying their bullish bets are right to some extent of course. Just look at the Eurozone where we have been blessed with one good economic report after the other this week (hint low inflation and decent economic data usually are pretty good for risk assets!).

But this is ONLY part of the story and China escalating the currency wars and oil collapsing further into the abyss add salt to already festering wounds. Of course, all this (I suspect) is partly to bully the ECB and the Fed to 'get with POMO program' ... we'll see whether this listen.

Gold is doing alright though ... he he.

Just to be clear, though, ... very defensive and plenty of cash, but I am with Polemic. You can buy this dip with good effect towards the end of the month. God help the dip buyers I say ... god help us all ;).

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washedup
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January 6, 2016 at 2:50 PM ×

CV - agree on all that couldn't resist nibbling on some FEZ here - takes a lot for this curmudgeon to own risk nowadays, but the european data has been very positive.
For you economist aficionados, this week's cover was - 'The Fall of Brazil', complete with a picture of Dilma looking like Marie Antoinette a few days after she had suggested a certain dessert to the masses.
Good luck out there.

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Jim
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January 6, 2016 at 2:52 PM ×

"There is no plan B, there is only one plan. The ECB stands ready to take all measures that are necessary to bring inflation to 2%. If you print enough money, you will always get inflation. Always."

Peter Praet, Member of the Executive Board of the ECB 6 January 2016

"To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm."

Friedrich August von Hayek

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Leftback
admin
January 6, 2016 at 3:24 PM ×

Washed, good points and we don't disagree with you on any of that, including the price action at the long end. As always, there may be a delay following the news before the market falls precipitously. Interesting news couplet last night (N Korea has an H Bomb and Saudis announce crude oil prices will be lower). A few years ago the reaction in gold, bonds, bunds, gilts and yen would have been much more exaggerated, and you can place the blame for that malfunction squarely on the central banks.

Not at all tempted to go knife catching here until we see signs of what Polemic calls global risky asset "towel chucking" behavior. At some point Asian market participants (they are always the first to go) will finally drop trou and start to run around with their underwear on their head having a bloody good panic. Nothing says panic like the Japanese and Aussie banks buying the yen. We don't think it has stopped raining yet, so we are going to keep our umbrellas up for the time being.

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abee crombie
admin
January 6, 2016 at 4:32 PM ×

Did everyone catch this from Jeff Saut. Its classic

This is how the stock market works:

“Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10, and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further, and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him. In the absence of the man, the assistant told the villagers, ‘Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.’ The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!

Now you have a better understanding of how the stock market works.”

. . . Author unknown

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Nico G
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January 6, 2016 at 4:58 PM ×

current intraday volatility makes much fun of a 10 point stop - low 1970s hit before FOMC still kinda lean towards a bounce. I tried a scalp long to ease the pain on my work colleague PhoneyMoney still trapped in the toilet puking

a couple of sessions ago and 100 points higher hipsters were rejoicing for new highs hailing their god Santa Merry - another good god turned bad Janus is now enjoining further pain

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Anonymous
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January 6, 2016 at 5:00 PM ×

abee - Nice story. The "man" are HFT firms and the "assistant" are exchanges.

We could add to the story as follows:
"The angry villagers, now bereft of savings and facing starvation, called a policeman. He spoke to the man and his assistant, who gave him $100 and reassured him all was well. Later the policeman told the villagers that the assistant was a regulated entity and thus their savings could not have disappeared, and that furthermore the man was providing them a great service in providing liquidity to monkey markets. The villagers all agreed that they'd received a great deal all 'round. The End."

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Macro Man
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January 6, 2016 at 5:07 PM ×

"The police then blamed the collapse in the price of monkeys on one bloke living over his mum's garage. The DOJ then fined a few of the villagers who had discussed the best way to catch monkeys $6 billion apiece."

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Anonymous
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January 6, 2016 at 5:11 PM ×

MM - lol. V good.

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Leftback
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January 6, 2016 at 5:25 PM ×

New lows in RBOB on increased gasoline supplies and those numbers have already dragged Brent below $35 briefly today. It's extremely tough sledding out there for anyone trying to stay long oil, refined products or energy stocks. SPX 2000 is now resistance and so is USDJPY 119. This selling episode isn't over yet. We will need to see some kind of capitulation before we see dip buying in any significant size. Be careful out there.

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Anonymous
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January 6, 2016 at 5:30 PM ×

interesting views on price action at start of year- i for one just dont see the point of buying a dip in spoos- valuation aside ,price action was one thing that kept trend up but even that seems to have changed...i am short and looking to add on rallies....still running some long europe against it but that spread hasn't done too well lately.given improvement in europe and easy fiscal and monetary policies that is my goto long equity trade.
got lucky on some fang shorts which I'm trying to trade around and as much as i hate brazil the economist cover has me nibbling!
GDX worth noting that even with USD strength has started to catch a bid...
one thing which cautions against pushing shorts is that compared to dec lows here, vix and vvix lower and we also not getting meaningful expansion in new lows so momentum might be fizzling on this down leg...

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Nico G
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January 6, 2016 at 5:41 PM ×

LB yep yep good to see JPY position finally in the money and USDJPY has a great lot of leg in it. 105 a sweet target if you give it enough time

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Leftback
admin
January 6, 2016 at 6:57 PM ×

Crude has now broken below $34, down another 5-6% today and it's gruesome for the domestic producers. WLL is down 12% (sorry MJ, feeling your pain, it's not personal!). Bad news for the hopeful longs who bottom-fished into the end of 2015. You really need a long time horizon when it comes to Dumpster Diving and Knife Catching. Sooner or later, someone out there in Credit Land is going to be feeling a lot of pain and we are going to see HY take another leg down.

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Mr. T
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January 6, 2016 at 8:04 PM ×

Yeah upstream everywhere (not just NA) is a mess. I've got some bloody hands on a couple of them for sure. There are some interesting ideas out there still though. For example, take WPX - 1.3Bil cap, 3.4B debt, sitting on around 1.5B in unrealized gains from hedging. I own the stock, its already a 6 month call option on higher oil, I think they should just realize the gains and go unhedged. There are a lot of upstream names in the same boat. I didn't like it when CLR did this at $80, but its a whole different game at $30.

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Anonymous
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January 6, 2016 at 8:10 PM ×

Interestingly, unlike equities, HYG just falls a little bit. Panic is not here yet.

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Anonymous
admin
January 6, 2016 at 8:17 PM ×

The villagers all agreed that they'd received a great deal all 'round.
What The Fed did, and I was part of it, was front-loaded an enormous MONKEY rally in order to create a wealth effect"
Richard Fisher

Monkeys = pensions.

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January 6, 2016 at 8:36 PM ×

@Left - No offence taken. If I wanted to have a non-cyclical job I would have been a binman (dustman from back home). Anyway, they have me stock as a bonus this year. It'll make me some money, or clean my backside. So useful eitherway.

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Leftback
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January 6, 2016 at 8:50 PM ×

Still no panic. SPX 1990 area was support, and is now resistance. FTSE will be a shit-show tomorrow b/c of energy and mining. Let's see what happens in Tokyo and Shanghai overnight to set the tone for tomorrow.

At the moment it's hard to see what can prevent crude oil (WTI) from slipping below $30 and testing the GFC lows. Remarkable. Surely we see some tangible signs of distressed credit in US energy very very soon (M&A activity, PE buyouts, bankruptcy etc..). When crude finally turns (up) it's possible we also see a turn (down) in the USD and a near-term bottom in US10y yields. That's when things may begin to get really ugly for US equities, the energy complex excepted.

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abee crombie
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January 6, 2016 at 11:13 PM ×

We need a big bankruptcy in crude to get capitulation, but its gonna take some time. CHK and SWN are the consensus ones to look at. Other than that, anything below $30, you should seriously consider trying to find ways to go long bc prices are no sustainable at those levels. Supply will adjust eventually, and one day Saudi will take its foot off the accelerator bc either declines start increasing or budgetary pressure. From a purely short term perspective, they could do that already, sacrificing 1M barrels a day and likely make up the difference with the increased price, but they dont want to do that.

Crappy leveraged stocks and bonds can go to zero. Accounting frauds go to zero. But unless you are selling whale fat or Zimbabwe dollars, not all asset classes go down forever. Unfortunately there are no easy buys here, but oil will rip to the upside at some point.

But until that happens, S&P is below the 200 day, and breaking swing lows. Not good for systems/CTA guys, who are probably piling in short. R2K near 52 week lows.

Last time this happened, Nasdaq earnings saved the day. Can it happen again? Financials kick it off end of next week but Nasdaq standouts dont really start to the last week of Jan.

Buyers have been coming in on the close of US and EU sessions if that means anything. When in doubt get out, and thats what I'm doing

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Anonymous
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January 6, 2016 at 11:42 PM ×

Mr T - your comment on WPX derivatives is wrong. They have a derivative asset of $369mm not the $1.5bn you claim in your comment. WPX is a highly leveraged company of dubious asset quality with a high risk of bankruptcy in the next 12-18 months. For disclosure I am short the bonds and the equity. Their existing asset base (ie excluding RKI acquisition) had a significant oil production decline of 6.4% quarter on quarter despite the fact they have spent $890mm on capex in the first 9 months (they claim 640 but 890 was their actual cash capex). They overpaid for RKI - it was a hail mary deal which they did because their existing asset base sucks and bankers were happy to oblige given the massive fees. The street thinks they are going to hold production next year with a $650 or less capex. Absolutely no chance. They may front load to keep the chirade going for a little longer but you are really short theta owning this dog. The beauty of the short is that they have hedged a fair bit of oil production at $61 in 2016 a level at which they lose money on anyway. I will caveat that a decent sale of the Piceance will buy them a little more time, although I think its unlikely but i was surprised at the ridiculous prices infrastructure funds pay for gathering assets which potentially have little value if the area in which they are situated is uneconomic, so i may be surprised again.

There are certainly worse shale producers and some who are worse with even higher valuations but they are shorts too. The best call on oil is oil itself or venezuelan bonds or russian equities. Shale company valuations currently back out an oil strip in the 60-80s depending on company, so you are really buying in to the most awful bubble relative to the current strip.

I am hoping that shale cracks, and the ebitda valuation approach is permanently thrown on the scrap heap (how can you use ebitda whan capex is opex? When capex is 1.5-2x ebitda consistently and theres barely any growth and a massive decline if you switch it off???). Maybe then there will be real bargains in the more leveraged plays.

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Reddy
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January 7, 2016 at 2:43 PM ×

CHINA SUSPENDS STOCK CIRCUIT BREAKER RULE - Short term relief rally

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