Harsh (Crude) Realities

I'm gonna take a victory lap (and you'll have to trust me on this one). And then get back to kicking myself for not seeing this one coming!

Let me start by telling you a quick story. The scene goes back to mid-September 2014. Yours truly (let's call me MC) was in the pantry during Asia market hours with a coworker named Goofy Man (let's call him GM).

Me and Goofy Man talking markets



GM: How goes it?

MC: Same sh*t, different day. By the way, you watching crude these days? WTI? This thing might fall off a cliff.

GM: Dude, no way. Bottom of the range. At the most goes to 80's. By the way, have you looked at EM and Europe? Valuation is so cheap!

MC: Dude, valuation can be cheap for who knows how long. But, seriously. Look at this oil thing. Have you been following the Russian headlines?

GM: Russia in turmoil means higher oil prices. Everybody knows that. You want any of these spicy green chilis with your lamb vindaloo?

MC: Yeah, I take whatever else you're not eating. Thanks. Dude, but seriously, look at these production stats on my excel. Oil can take go from here to the 50's or 40's. Have you read Alchemy of Finance by George Soros, this is kinda like the oil glut in the 80's.

GM: Dude this is some good chicken masala.

Back in September 2014, I recommended to researchers and PMs at my firm that oil could collapse 50% or more. I should've made F**k you/retirement money on this trade at the age of 24, turning 25. Sadly, I did not. The oil glut mirrored that of the glut in 1985 detailed in George Soros' Alchemy of Finance (one of my favorite investing books). Maybe he made f**k you money for his crude trade. With that said, the catalyst that led to the glut was not over-extended credit in OPEC nations from the international lending boom back in the 1970's/80's. In this situation back in 2014, the catalyst was the need for Russia to increase sales of crude to meet their budget.

That was my number one insight. The fact that as crude prices fell, Russia would need to sell more quantity of crude to make the same amount of money, attempting to meet their budget. As they sold more, the more crude prices would fall. This would occur in a reflexive process.

Secondly, I did some studies on adjusted vehicle sales and fuel efficiency, showing that the purchase of fuel adjusted car sales globally and US have declined while oil inventory has risen.

Lastly, my most important insight is in the chart below.

Back when I look at crude in September 2014, OPEC market share was at 30-year lows. What that told me was that OPEC had no ability to step in and cut production in meaningful ways to support crude. (crudely circled in red on the chart. Pun intended)


This leads to me kicking myself. Damn it. Why didn't I see it coming?

Nowadays, I haven't looked at crude for a while now. When WTI hit the 40's/30's back in 2015, it became uninteresting. With that said, looking at it global market share today, we are not exactly at the highs either for OPEC market share.

It seems to me that the current fall in crude can continue more.



Production has stayed elevated since the bottom of crude in 2015. Inventory, on the other hand, has even risen since 2015, despite what the small bounce in oil prices might imply. And surprisingly, speculative positioning has risen back to elevated levels before the oil crash.





I'm watching this oil market break out of the range - kicking myself since I should've been short, or at least have told the Goofy Man.

I think we have a lot of downside left.

With WTI falling along with base metals and other commodities, I think we should be in the camp of lower yields and lower breakeven inflation. I know, I know. I was big in the camp of huge inflation, but like the great John Maynard Keynes said,  "When the facts change, I change my mind."

Well, in this situation, as a speculator, when the sentiments change, I change my mind. Haha, I know, I know. I'm cheating.

This move also has other ramifications. A lot of US high yield are energy dependent. We are all sitting here thinking why is the VIX so low and what can drive it higher. Hmmm. We will see. (the VIX, is that a MM post to come? Hmm.) Also, the driver for lack of commodities demand, and the fall of crude - could that be driven by something more sinister, like China? (I see a lot of China comments, maybe there will be a China post coming soon). 

Thanks guys, good luck with the jobs number tomorrow.

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fwdem
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May 5, 2017 at 8:31 AM ×

in this situation, the catalyst was the need for Russia to increase sales of crude to meet their budget.

Not sure, but isn't Russia's production less elastic than OPEC's? Russia did a significant adjustment via devaluation. Aren't the OPEC states more of a culprit here? Up until today we haven't seen much adjustment in their economy apart from the Saudi 'beyond oil' economy plan... a chunky Eurobond issue and the planned privatization of Aramco. I'm a buyer of oil here against RUB (seems overvalued against current oil and negative seasonality). Not sure where oil is heading, but if one is really bearish, shouldn't one put on some Saudior GCC deval risk on?

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Detroit Red
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May 5, 2017 at 9:35 AM ×

Re: fwdem

Sorry if I wasn't being clear. I was saying that back in 2014, Russia supply/production, or at least the market's perception of it, was indeed more elastic than OPEC, in the sense that they had to produce more to meet their budget. Back at that time, OPEC production was actually inelastic as their market share was at 25/30 year lows. OPEC had to keep producing the same amount, if not a little more to maintain market share.

Fast forward to today. From what I see, OPEC market share is still low. Thus they will be in a similar predicament of continual production, keeping the oil price low. I don't think Russia is the driver this time around - I agree this time, the move seems to be driven by OPEC/Saudi/Aramco and possibility global/China slowdown.

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Rain
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May 5, 2017 at 10:49 AM ×

Just seeing the comments on the previous post along with this post.

When you have have a position that does well quickly, (short oil) it's sometimes easy to get ahead of oneself and think its going to keep plummeting. I don't have any position in oil at the moment, looking on objectively, you have to say the price action in Asia smacks of stop losses being run/liquidations as IPA was saying in the comments. I'd think for now the low is in.

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May 5, 2017 at 12:27 PM ×

One shouldn't forget the hedging reactivity of shale producers and the path dependency of what happened to them in 2015. If you lived through that, and aren't hedging, what the **** are you doing? Their inherent negative convexity is substantial, selling into the selling ... And oil vol thus seems cheap, particularly if you think of the Pemex hedges too, and lack of supply of risk-bearing capacity in options land.

Just eye-balling the charts but looks like hedging going through 10am ish each day perhaps?

Toy model from 2015

https://www.bloomberg.com/news/articles/2015-02-11/goldman-here-s-why-oil-crashed-and-why-lower-prices-are-here-to-stay

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IPA
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May 5, 2017 at 3:07 PM ×

Really like how WTI bounced and is building a higher low on short term charts. Looks like they are using 50 sma on 15 min as a guide right now. Added slightly to my overnight position on this am pullback to $45 but nothing crazy. The animal can puke down with zero support as bids get pulled going into the w/end. It's all about the close here. Above $45 sets a nice recovery early next week. Below opens some worries and hesitation until $45 is regained. I will say it again, the best way to play this is through XLE and XOP, imo. Also, I am really loading up on CHK here. Look at crazy volume on Oct $5 calls yesterday. Nat gas is holding up really well through the commodity carnage.

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johno
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May 5, 2017 at 4:06 PM ×

Jens and I live to die another day in EURNOK. Actually covered part of the short as oil was plummeting last night and I didn't know what was going on, but put back on and went as big as I ever go in FX. Have now taken my short back to comfortable size and net profitable on this one (yep, I sold that much of it late yesterday and overnight). I'll have to reflect on this one, but I suppose I'm mildly happy I top-sliced it hard yesterday.

Fortunately covered my BTP short the other day. Seems there are two ways things go coming out of French 2nd round (and therefore going into it, since markets are more comfortable pricing out election risk now): one narrative is that the French election is seen marking the end of the populist trade, in which case everyone sells the populist trades (i.e. cover BTP shorts); the other is the market starts anticipating ECB tapering and selling bonds where credit risk pricing was suppressed (i.e. short BTPs). I didn't like how BTPs were trading the other day, so covered thinking the market may embrace the former narrative. Also, Portugal has come in hard. The other day when I looked there was like a 140bps spread between the 10Y 1Y forward of the Italian and Portuguese sovereign curves, which I use to judge how suppressed Italian credit risk is (Portugal has hit ECB issuer limits, so it's suppressed with QE like Italy is, but also note Portugal is one notch lower than Italy).

Booked profit on France today. Great trade done in way way way too little size, but instructive. When everyone is looking for options on the disaster scenario, look for options on the base case!! I bought May options on French equities priced in USD two days before the 1st round. I just sold them for over four times what I paid. Over four times profit on a bet that the polls (which should be the base case) would actually be correct. Again, way way way way too small a bet, so no congratulations on this one, but hopefully something to be learned.

Back to oil, I think it's now down to where it should be trading given inventories in the US. Not cheap. But, if we get the extension and the sizable draws in H2 that so many analysts predict, it should go higher from here.

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johno
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May 5, 2017 at 4:19 PM ×

typo. Meant Portugal's credit risk *isn't* suppressed like Italy's is.

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johno
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May 5, 2017 at 7:08 PM ×

Filling up some more space here ...

USDTWD is interesting. Vols have fallen back down, so some decent payoffs are possible. A couple things make me think this cross goes lower. One. Look at the whole spat with South Korea over trade and trying to get them to pay for THAAD. Taiwan can't expect that "my enemy's enemy is my friend" and "support democracies" imperatives are going to give them cover for mercantilist FX policy. I think this must be dawning on the Taiwanese (that said, I don't know any living, breathing Taiwanese people living in Taiwan, so WTF do I know?). TSMC's chairman's comments suggest that corporations understand the central bank isn't going to manage the currency for competitiveness like they used to. You also had the central bank telling insurers to get hedged (for the same reason). Two. The Taiwanese export cycle is the Apple iPhone cycle (a JPM April 28 piece on this had a nice chart illustrating the point), and we're on the cusp of an iPhone cycle. Yes, China is slowing but 1) Taiwan exports stuff to China which China then adds value to and re-exports, which is to say Taiwan doesn't export stuff to meet Chinese domestic demand (as does, say, Indonesia) and 2) I doubt Xi is going to let the CBRC and Guo risk a major accident in their shadow banking crackdown until after the 19th National Congress is over. Yes, the Fed is going to hike in June, but that's now priced, so shouldn't to USDTWD matter the next couple months.

I am not much of a commodities guy, but how about aluminum? Held in really well through this metals selloff. The facile story, which is all I know, is China starting to address over-capacity as it did in steel. I'd love for someone to explain why aluminum isn't in a bull market with some legs.

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IPA
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May 5, 2017 at 10:34 PM ×

Pretty constructive close on WTI. Safe to get back in? Depends on your taste of risk and how strong your heart is. You trade for living? Your heart better be strong. This being said, you have a place to stop your long out. Price breaks today's low you get out. Too much risk for you? You enter here ($46.50) you got roughly $2.80 to lose. What's your target? I say $50. Nice round number with stops above it to help you out with a magnet. So that's 1.25 reward/risk. I say you wait for a pullback to $45.50ish and increase your r/r to 2.5

Just be honest, everyone and their brother will be looking to buy there, so front run it by 20 cents. You may just get lucky and get filled @ $45.70 and ride the next wave up :)

Look at the volume, back to back days of almost a Million contracts traded per day. Today was second highest volume of 2017. You look at that beautiful daily candle and you ask yourself: was this it? I say they try to fill in the tail (lower shadow) but fail at bodies of today's and yesterday's candles, and that's $45.50

Specs have been washed out of Crude, imo. Ultimate target for WTI long trade is $52-53 but $50 would do just fine. Long and added to XLE and XOP yesterday (all call options with Jan '18 exp) with a target of upper bollinger band on monthly.

Good weekend everyone!

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Good Times
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May 5, 2017 at 11:35 PM ×

Remember when Nico shorted SP500, EuroStoxx etc to the tune of hundred of contracts, losing millions of dollars, because that was definitely the top? Or when Nico guaranteed that Le Pen would win?

Seeing as equity indexes have made new ATHs, with SP500 busting up to 2400 and European equities going parabolic into the close, I'm assuming this wasn't his finest hour. Good times. LOL

“Two things are infinite: the universe and human stupidity; and I'm not sure about the universe.”



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Unknown
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May 6, 2017 at 12:18 AM ×

@ johno,

Regarding your China comment, just want to give a different prospective.

I think you need to consider recency bias. China experienced a period of tightening in 2014 and 2015 and did cut some over-capacity. Then it let loose in 2016 and resulted in a huge bubble in housing market and basic materials. So at the beginning of this year it replaced top officials of regulators to do another around of tightening in shadow-banking sector. So you might underestimate their willingness to keep the pressure on. Also, after the dramatic market crashes in 2015 and 2016 in China, the bar of rescuing markets is set at a very high level. Their tolerance for the risk event is also high since the large part of local government debts had either been exchanged with equities or rolled over in 2016. And the uncertainty of the Party congress will cause some liquidation and capital flight (if it is still possible at the large extent.)

In my view, the opportunity might come after the 19th Party congress when the new power center will be formed and they are ready to spend money again.

On aluminum, I can think of one reason of bear case: automakers are in troubled water now and I do not think they are hurry to expand production. There are over-capacity in auto markets everywhere. So demand for aluminum should be down for a while.

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Leftback
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May 6, 2017 at 4:55 PM ×

Nice post. As we have said many times here this year about oil, it's going lower, and so is inflation.

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IPA
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May 7, 2017 at 3:24 PM ×

Canada will make the lunatic mad and he'll hit them where it hurts the most. He'll ban their hockey players from entering US and Canada would go into recession overnight :)

http://www.bbc.co.uk/news/amp/39826013

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Gus
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May 7, 2017 at 5:03 PM ×

Ambrose Evans-Pritchard:

The big US banks are advising clients to take money off the table as the "Icarus trade" flames too high. "We look to use any further strength over the next weeks as a good opportunity to reduce exposure and lock in some profits," says JPMorgan's Mislav Matejka. Key among his six "red flags" is fading stimulus in China.

The latest Chinese mini-boom has been a wonder to behold. The authorities panicked after the economy hit a wall in early 2015 and reverted to extreme debt creation. The Bank for International Settlements warns that the "credit to GDP gap" has reached 30 points, the highest in the world and the highest yet in China. Any score above 10 is a warning sign.

Net fiscal stimulus reached 10 per cent of GDP last year. This matched the post-Lehman surge in 2009, but the circumstances are different and the efficiency of credit has in any case collapsed. It now takes 13 yuan of new debt to generate one yuan of growth.

Beijing began stealth tightening six months ago. This is turning into a full-fledged effort to rein in the $US8 trillion shadow banking nexus.

"The Chinese economy peaked in the first quarter and is set to lose steam for the rest of 2017," said Danske Bank. Caixin's manufacturing index is the weakest in seven months. Steel output has dropped to 2015 levels. Planned investment is even lower. Housing curbs are biting with a delay. China's credit impulse has turned negative.

Saxo Bank says the contractionary forces are so powerful that the Chinese economy may slide towards a "full stop" later this year, with tremors through the commodity nexus and with risk of outright falls in world GDP.

"The markets are pricing in a 20 per cent chance of a recession, but after returning from China, we think it is more like 60 per cent," said Saxo's Steen Jakobsen.

"China accounts for half of world growth and it is hard to see what can replace this. Trump won't move the needle until next year at best. We don't think any central bank should be tightening right now," he said.

The business cycle has not been abolished. It invariably ends when policymakers hit the brakes too hard. Judging that moment is never easy. But the risks are rising and there will be nowhere to hide in Europe if and when "Chimerica" buckles.

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HH
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May 7, 2017 at 7:01 PM ×

Ignore Ambrose and the other retards. They've been blathering on about a market crash and the end of the EU for the past 8 years and have been consistently wrong. In fact everyone who has warned of a crash in equities has been shown to be a fuckwit of the highest magnitude. Frankly these people deserve to lose all their money, and in fact they do.

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checkmate
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May 8, 2017 at 8:15 AM ×

"Frankly these people deserve to lose all their money, and in fact they do."
Report Card. Use of the word 'all' denoting a tendency to exaggerate. Use of the expression "in fact they do' denoting confusion over differentiating a fact from an unfounded assumption. Recommendation, to take a course in Philosophy to develop the ability to develop clear logically structured arguments.

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Eddie
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May 8, 2017 at 10:13 AM ×

I would suggest Epistemology 101 to know what we know, what we don't know and what is unknowable. Could make a difference these days...

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eruditetroll
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May 8, 2017 at 10:53 AM ×

I have absolutely no idea regarding the short term path of oil prices.

But in the long term (as in far after I am dead), I am as bearish as can be. Why? I see parallels to history.

I call the twentieth century "the century of food." Okay, I admit that a few other important things happened during that time, but (as most people here know), the massive increases in agricultural productivity that allowed the number of people employed in the production of food to fall from roughly one-third of the population at the beginning of the century to between one and two percent of the population (depending on the classification definitions for counting) at the end was one of the most important economic developments of the twentieth century. The release of all those people involved in food production to provide other goods and service, as well as the massive declines in the cost of food (relative to income) was one of the biggest contributors to the improved standards of living during that time.

If you have been paying attention, you have already deduced that my claim is that the twenty-first century is "the century of energy," and that by the end of the century, two things will happen. First, the energy industry will be much smaller (in terms of employment), and energy prices will be MUCH, much lower than today. I don't know how that happens (there are still technical problems in collection, conversion, and storage to solve, but there are a lot of bright people working on those), but I am quite confident that it does. There is simply more energy available than we can even imagine using. Capturing all of the solar energy available on earth is more than enough for our needs, but if it weren't, I once calculated (I was a math major, but no guarantee that I got this one right) that every second, the amount of energy that the sun spits out is the same amount of solar energy that actually hits the earth every SEVENTY YEARS. Don't know if they are going to be able to make something that looks and acts like oil from that, but it won't matter - we are not going to have plenty of energy for the Keynesian long run.

How that affects oil over the next six months, again, no idea. But when I start hearing talks of shortages and massively higher prices ("300 dollar oil is coming"), I know that its time to go short again.

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johno
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May 8, 2017 at 3:09 PM ×

eruditetroll, the "genius" calling for $70 (forget $300) oil got taken out Thursday. Iran is talking $55. I think the narrative is converging on "there's abundant, quick-to-produce resources at break-evens that will steadily decline in real terms." Given the capitulation, the plausible explanations for why the disappointing draws will prove transitory, and the fact that both Saudi and Russia just came out and said they'd extend into 2018 to get inventories down, I don't think there's money to be made near-term from being bearish oil.

That goes for bonds too. It's in the price, LB. Now that the French election is over, the market can get focused on the Fed. The Fed wants to hike. The ECI is the best statistic on wage growth and it looks to be breaking higher. UE is 4.4%. Beyond the June hike, market pricing is very flat. I just got short the 5-year this morning. The US long-end doesn't seem mis-priced, but mechanically, issuer limits mean ECB has got to taper sovereign bond QE next year, so Europe's long-end is a short (conveniently, carry isn't so punitive there either).

Today's European action wasn't surprising to me. Markets are forward looking. When Macron won the first round, markets looked to the second round. And now that he won the second round, they look to the uncertainty of the lower house elections in June, which will determine whether Macron can get anything done, or whether he ends up as ineffectual as Renzi. We've had a clearing out of the short-term specs in the euro, so I'm not reading to much into today's euro move. Tomorrow will be more interesting to watch. SDP loss to Merkel is a net euro negative, too, since they'd be more willing to make concessions for eurozone cohesion.

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Jim
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May 8, 2017 at 3:15 PM ×

Bill Cara:
As long as there are futures markets that can move risk out to infinity, the cash markets can be held hostage. And they have been.

As long as central banks are not being held to account for liabilities that exceed assets plus equity, those powers that be will exercise control over our markets.

As long as governments can roll over their debt into 50 to 100 year bonds — oh, it’s coming — they will spend our money in the best interests of the lobbyists who work for the richest, most powerful, and best organized amongst us.

Do you recall back then that many of us were questioning the manipulation we thought happening — only to later to discover how true it was — in silver and gold, LIBOR, mortgage-backed securities and so forth. Today we discover how much the central banks of the world have taken hostage of prices. Even if a stock has little investment merit, a central bank will now decide to buy it in order to have their domestic currency sell off and the USD rise in order to support their exporters and in-bound travel industries.

https://twitter.com/jmanfreddi/status/861212426192203776

https://twitter.com/jmanfreddi/status/861211522739167232

https://twitter.com/jmanfreddi/status/861211621120778242

"...the only way I see how to succeed in the reality we have today is to quickly get in and get out of prices. Book profits, book profits, book profits."

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MANU
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May 8, 2017 at 3:16 PM ×

Food for thought: The last crude oil barrel will be worth zero rather than millions.

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CV
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May 8, 2017 at 3:30 PM ×

Good post! Pretty much do or die for oil here. If it takes a deep dive here, economists will have to scribble down new inflation forecasts. In another place, I jotted down some thoughts on this;

"Clearly, OPEC's attempt to control price via supply cuts hasn't worked. This tells us that OPEC is not a real cartel—i.e. that collusion is not effective anymore—or that its members are not the marginal producer in the global economy. It's probably both. This means that we have to look elsewhere for the swing producer, most likely to the U.S. shale cowboys. The crash to $25 was enough for them to stop drilling, but it seems that the rebound and sustained levitation around $50-to-$55 has been enough for them go all in again. So, if $50-to-$55 is the ceiling, what is the floor? I am not sure that it is as low as $25, but I can't dismiss it. One of the key mistakes markets have made with respect to U.S. shale producers is underestimate their ability to adjust production quickly, and to produce even at very low prices."

So, MM commenters ... where is the floor, and are we hitting it again? Meanwhile, I would love if Lefty checked in with Chad and his vol selling friends at the Pension R'Us fund. I bet they're having a bit of Dom Perignon and perhaps some lady friends too at the moment ;) ?

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IPA
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May 8, 2017 at 3:46 PM ×

Consecutive daily closes above $47.60 will send WTI shorts packing. Still would like to add @ 45.70 (if given a chance) but happy with my 44.15 and 45 entries. Target 50 & 52 with stop @ 43.70

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fwdem
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May 8, 2017 at 4:36 PM ×

There is a comment by Citi's Ed Morse in the FT today, he reckons we are in a 40-65$ range, the arguments sound reasonable to me and he and his team have been correct with calling for a ubstantial oil decline in 2013.

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johno
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May 8, 2017 at 6:01 PM ×

Thanks for mentioning that piece, fwdem. I missed it. Sounds like Morse would favor something like long COZ7 / short COZ8. Anyone have a view on that?

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Leftback
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May 8, 2017 at 6:02 PM ×

Let's make that a $40-50 range for the time being. Anyone who has their heart set on $65 can kiss their money goodbye now. It might be a good idea to look at longer-term charts for oil and look at other times of plentiful production. Ouch...

This is one of those times when charts, positioning and fundamentals are all aligned. Technical analysis suggests that crude is trending lower, while punters are still positioned long in a trade of overwhelming scale. Fundamentals, well, there will be a lot of shrieking about this, but let's just say that we in the US are absolutely awash in oil and products….

I think the fundamental flaws in the recent bullish arguments are:

1) Underestimating the slowdown in China (understandable given largely fake data)
2) Overestimating the power of OPEC to limit production
3) Underestimating the need and/or greed of producers in the US and other non-OPEC countries
4) Overestimating energy usage demand in developed nations that are becoming more energy-efficient every year
5) Overestimating the great Trumpian reflation in the US as well as global growth in general in 2017

Somewhere between $40-45 we will start to see problems in high yield credit once more and oil and gas stocks are going to fall, so don't fall in love with XLE or HYG here. Spreads will widen and falling inflation data will augment risk-off demand for Treasuries - which will more than offset fixed income weakness associated with a recovery in Europe.

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IPA
admin
May 8, 2017 at 6:24 PM ×

Leftback, not trying to win a war, just a battle. I am a trader with no nonsense approach. I am wrong and out quickly. I am right and hold on for my targets. Specs positioning is the lowest since Nov 2016.

On to a totally different vehicle now... Shorting AVGO here again with a tight stop above the ATH and the following targets: 210, 200, 190.

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johno
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May 9, 2017 at 12:03 AM ×

Fred Goodwin: "The ECB gets the gold star in 2017. They doled out €233 billion in free money as part of their final LTRO program.... If you annualize out the 2017 combined balance sheet activities of the Fed, ECB, BOJ, SNB and BOE, liquidity is growing faster than at any other time since the GFC."

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Gus
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May 9, 2017 at 2:36 AM ×

Leftback ... am wondering if the Aramco IPO enters into your oil view at all. For example:

>>> Russia and Saudi Arabia spoke [today] in support of extending the current cuts past their June 30 expiration into 2018, and Kuwaiti Energy Minister Essam al-Marzouq also said there "is almost consensus about the importance of extending the agreement for at least six months," adding that his country supports it. A 2018 timeline is especially key to Saudi Arabia, as it shops around Saudi Aramco's [$2 trillion] initial public offering, which is expected next year. Higher oil prices could boost demand for Aramco shares, and proceeds from the IPO are needed to fund the kingdom's economic reform agenda.<<<

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checkmate
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May 9, 2017 at 8:03 AM ×

Ever since it was announced I thought that the Aramco IPO writ large the longer term future for oil. I equate it to the UK selling off the crown jewels. The Saudis don't have much faith in the future value of oil if they are willing to start selling down the 'crown' in oil. I don't care if it goes up 50% on day 1 no buy and hold will end up making money from it.

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checkmate
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May 9, 2017 at 10:55 AM ×

"augment risk-off demand for Treasuries"
As it stands I think the Vix is saying a lot about the lack of demand for teasuries 'risk off'. Given the Vix moves post the first round of the French election I would also question how much the lonbg move in treasures this year was down to political risk as opposed to convictions about the price of oil/inflation. Had I held my gilts position past that first round election date then att his juncture I would have already given back far too much of my YTD profits. I can only assume others in the US market would be approximately in the same position. With the political risk out of the way and a rate rise ahead I think it's too ealry by far to be postioned long in treasuries. Will such a time come , I rather suspect it will ,but I just don't think this is that time.

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checkmate
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May 9, 2017 at 12:54 PM ×

"Emmanuel Macron wants 'buy European act' to stop UK firms winning EU contracts  "
That's a relief. It's somehow reassuring to see that new political leaders are as stupid as the old one's. I assume he is also happy to see a similar situation develop in the UK and the value of tourist £ and agricultural exports are also of little value to Frence. Yes, the two would not be exactly the same as one is distinctly public sector whilst the other would largely be private sector money. However, both are the essence of protectionism and in that Macromoron needs to rethink what the cost of protectionsim is going to be to the French economy BEFORE he advocates it.

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HH
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May 9, 2017 at 5:39 PM ×

https://www.bloomberg.com/news/articles/2017-05-08/equity-volatility-tumbles-as-bonds-decline-markets-wrap

TL;DR: SP500 and Nasdaq100 at new ATHs (for the millionth time)

Imagine Nico's surprise when he drags himself out of his mom's basement, switches on his PC and finds he's lost another million or so. lol.

All the losers who try and short this equities market must be in so much pain right now. Christ, I'm gonna laugh if stocks double in price from here.

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HH
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May 9, 2017 at 6:11 PM ×

http://imgur.com/a/j6XWS

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Skr
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May 9, 2017 at 6:31 PM ×

Silver is at that old critical level,a weekly close below and we can kiss goodbye to commodities (metas oil, gas) for the foreseeable future.

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checkmate
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May 9, 2017 at 6:37 PM ×

Neither the Dow nor the SP500 have gained anything since the beginning of March. The exception is the Nas. Meanwhile across that period there have been an assortment of sectors that paid more to be short. Moreover anyone short oil or long USD/Yen ; GBP/$ have had an opportunity to make more than your equity market had to offer. It's a big marketplace out there and typically it's got a lot more to offer than your simplistic equity outlook.

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IPA
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May 9, 2017 at 6:57 PM ×

@checkmate, save the time and the effort. You can't talk to a wall. Well, you can, but the result is invariably the same.

Spanked in AVGO, but will try to put that same trade on the break of 225 if given a chance again, as long as I don't have more than 6 bucks of risk.

They let me have 45.70 WTI last entry scale-in and I'll hold on for dear life. It is not every day that you get these three tests and a bounce off of the same price level (more or less). If I don't take this trade then what am I trading for?

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Leftback
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May 9, 2017 at 7:47 PM ×

Peter Tchir also imagines a conversation around the table on vol selling:

http://www.zerohedge.com/news/2017-05-09/trader-its-going-zero

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HH
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May 9, 2017 at 11:09 PM ×

Gundlach shredding our very own Macro Man (Crise) on twitter:

- Implies MM is a complete nobody "who??"
- States MM is categorically wrong...
- States MM is irrelevant "No wonder no one listens to you"
- Savages BBerg...

lol

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johno
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May 9, 2017 at 11:12 PM ×

Re equities, I thought Jan Loeys' recent observation was interesting: "we find a 2-3 point multiple rise over anything from 3 to 24 months has not in fact been a bearish signal.... a value-driven strategy [shorting SPX any time since 1955 when the trailing multiple had risen over two points over the preceding 3 to 24 months] was a sure way to lose money, with the rare positive returns scored during large corrections such as October 1987. Even this victory was offset by the steady losses incurred by shorting the US equity market many months before the eventual correction." As Fred Goodwin observed, central bank liquidity is going full throttle and as Loeys has observed separately, no bear market has started in the US more than 13 months before a recession (which I'm not seeing, but I can't rely on my ability to see a recession coming that far out). Shorting equities is tough. And even if you're in a bear market, you can get killed shorting ... look at what happened to Jesse Livermore, arguably one of the greatest speculators ever.

Probably also worth remarking on Jeremy Grantham's latest quarterly. He summarizes: "stock prices are held up by abnormal profit margins, which in turn are produced mainly by lower real rates, the benefits of which are not competed away because of increased monopoly power, etc." Real rates are driven by very slow-moving factors, so no reason to think valuation reverts to the pre-1997 mean.

So there you have it, even Jeremy Grantham has given up on all that valuation, mean-reversion stuff. Guess that leaves Bob Shiller ... always the University profs are the last to figure out what's going on, huh? Just buuuuy it, Bob!

Meanwhile, yours truly was getting caned in the Turkish lira today. The short in the US 5Y kept me flat, until this "US arming Kurds" leg to the selloff. Ah well. You know you can buy 1Y ATMS USDTRY digitals for only 25%? One of the cheapest currencies in the world by many measures, with a central bank that is aggressively upping rates, a State of Emergency that will hopefully get lifted, and inflation that is peaking out. And here I was, wasting space writing about paltry equities ... BOR-ING!








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May 9, 2017 at 11:19 PM ×

johno - Glad you finally came 'round to the view I was right (i.e. don't short equities in a bull market). Have to say you it's taken you long enough...

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checkmate
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May 10, 2017 at 8:01 AM ×

Imagining that US yields were to continue their current tangent and the long end tracks back to levels last seen at Dec and Mar expiry. This is going to be a reduction of the spread between bond and equities. Whilst I would expect this to be sector specific in equities in terms of impact does anyone have a chart to depict the spread between the broad asset groups of Treasuries and equities? I suspect LB might have some ideas on the spread issue so consider yourself invited to discuss. Just trying to establish if the move in question correlates to any useful signals.

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Fresh
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May 10, 2017 at 8:33 AM ×

Hi all.

Is anyone watching Aussie banks?

ANZ/NAB/WBC/CBA have all put down ho-hum results over the past week after rallying > 30% FYTD. Within all results 90+ day arrears rose (off a small base), while provisions again fell to ludicrously low levels. This comes at a time when investor loans are being re-priced higher out of cycle, and retail sales have printed negative in 3 of the past 4 months. Then last night the Aussie budget drops a bomb shell implying a ~$6.2b levy over the next 4 years. As a group they make ~$30b NPAT annually, so $1.55b ($6.2b/4) implies a ~5% on the spot d/g for each of the next 4 years.

Given these 4 stocks make up ~25% of the Aussie market, they have benefited disproportionately from passive inflows. Interested to hear thoughts, but I for one cannot come up with a rational thesis as to why you would own these at this point in the cycle. Just feels like peak earnings, peak multiple.

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IPA
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May 10, 2017 at 1:16 PM ×

EUR/USD stops below 1.0850 are building up, I bet. The gap is juicy and I don't hear too many players looking for it to fill. I will repeat what I said before French election, euro is going lower.

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Leftback
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May 10, 2017 at 2:32 PM ×

I am not sure what everyone else here thinks, but LB senses a disconnect between the "stability" of markets implied by VIX and by realized vol in equities of late and the "instability" that seems to be manifested in Washington DC, which is supposed to be about to deliver us through the eye of the needle guiding the recovering US economy from monetary easing to fiscal stimulus. No political bias is implied here, but the skepticism about Obama's ability to deliver was far greater than is the case here.

Safe havens are dramatically under-priced here. Dame Janet is watching all this and she is going to delay the handoff as soon as things get messy, just watch the Dot Plot fall in the months ahead. Long Bond, JPY, volatility. Get yours now. The vol selling committee is meeting again to discuss increasing leverage, no doubt. Look out below. Once this market loses faith in the reflationary power of Trumponomics, or even worse in the viability of US democracy, then this will be ugly.

He who panics first, panics best.

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Leftback
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May 10, 2017 at 2:43 PM ×

Crude rising again with strong momentum this morning, back above $46. It will be interesting to see whether this move is contained by $48, or even whether it will survive the next round of data releases.

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Leftback
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May 10, 2017 at 3:06 PM ×

It's not just supply. Folks in the Asian time zone see this as a demand issue.

Oil Demand Weak Says Trader

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Leftback
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May 10, 2017 at 3:37 PM ×

Thought experiment.

What would have happened to stability in East Germany or Romania if Honecker had fired and humiliated the Head of the Stasi, or Ceausescu fired the secret police chief? These are scenarios that would have caused extreme internal political divisions within some of the darkest regimes in history, and would surely have accelerated the decline of the entire regime.

I know, the U.S. is different… American exceptionalism again, right?

Confidence is a fragile thing. Once the world no longer believes this White House can get things done, then confidence in an economic recovery will shatter, and we will see capital flight, slow and steady, but both global and US capital will seek safety.

I wonder if the SNB will be able to contain a rise in the franc in the next flight to safety? Swissy, gold, yen, maybe even £?

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IPA
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May 10, 2017 at 4:20 PM ×

Leftback, that brings some deep memories. Erich and Nicolae were in power when I lived on the other side of the wall. Thank God Reagan had the will and the wherewithal to stand up to those men kissing in public. I am long gold and GDX.

Crude is hopping and I want to take 1/3 off @ 47.55 and bring my stop to b/e. I have an avg entry of 44.95

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MANU
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May 10, 2017 at 5:00 PM ×

IPA - What is your current rationale on XRT and retail related stocks in the US? They appear to be holding up quite surprisingly.

I am still holding, but have recovered from previous lows despite the negatives.

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IPA
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May 10, 2017 at 5:20 PM ×

MANU, I think that it's a rally in a bear market. The consensus thinking is probably that massive store closures and accompanying layoffs will make the retailers leaner and bring some stabilization to their bottom line. My thinking is that the erosion of brick and mortar biz is not only caused by Amazon and e-tailers but a fundamental consumer weakness and upcoming demand destruction. I look at auto sales cratering and I see a possible trend developing here. Wages are not rising, and while it seems like everyone who wants to work may have a job, it pays a whole lot less than the one they lost during the financial crisis employment debacle. I don't think XRT closes consecutively above the monthly middle bollinger band in the next year or so. If it does I'll be ready to capitulate.

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johno
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May 10, 2017 at 6:21 PM ×

Got long oil (futures and call spreads) before the API #s. Idea is that 1) we've seen a big speculative clearing last week, 2) inventory draws are going to show up soon (and people have been too focused on the US #s which are lagging the global market because the US has the world's lowest cost storage), 3) OPEC is upping its commitment ("beyond 2017" and maybe increasing cuts if prices go lower).

Very long oil through short EURNOK, which is still quite mis-priced to oil. Did take some profit on that post-DOE #s. Inflation data out of Norway last night was a disappointment on headline, but volatile food explained the miss, so upped my bet after that.
Mentioned USDTRY long-dated option pricing due to forward points the other day. Structured and traded something around that.

LB may well be right, but I think markets are more driven by global growth prospects than expectations around Trump. If the dots are going to fall hard, I think it's going to be because China gets tough on credit. Not expecting an "accident," but China may shock people by how far they let the economy slow post-19th National Congress in order to deal with their credit bubble. Heck, if Trump fails to pass much the dots may fall, but I could see the stock market holding up because the economic cycle stretches out longer without Trump over-heating things with pro-cyclical policies at the wrong time.

I still think you have to worry that the gap between market and dots in 2019 in particular close. The labor market is tight. Speaking of tight labor markets, does anyone have the contrarian view that we start seeing labor inflation in Japan picking up more? Some calendar distortions earlier this year probably make wages look too weak there.


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May 10, 2017 at 7:06 PM ×

@Leftback

If the catalyst is general loss of confidence in the U.S. as a going concern, are U.S. government bonds really the logical destination for a "flight to safety"?

I guess that might work as long as the wheels don't actually come off of the cart

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hipper
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May 10, 2017 at 10:41 PM ×

I think as long as US stays on top in Europe, Japan, Korea, Australia and gulf countries UST functions as safe haven regardless of nominal debt growth. However influence can't afford to falter in any one. Watch Korea though they elected now a more pro China, pro diplomacy not warmongering with NK and very cautious on Thaad prez.

Still I think those muni funds are pretty good. We've seemingly been waiting forever for California and co. bankruptcy yet it never seems to come. I think largest risk is reinvestment risk (lower yields) you see they have over time lowered payouts as well. If commodity blow up as some suggest they will continue to be good, but still hold GDX to supposedly protect from potential DXY weakening. Still, slowly but surely yields everywhere are being eaten away in the CB fantasy land.

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Skr
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May 10, 2017 at 11:59 PM ×

@HH
"Gundlach shredding our very own Macro Man (Crise) on twitter:

- Implies MM is a complete nobody "who??"
- States MM is categorically wrong...
- States MM is irrelevant "No wonder no one listens to you"
- Savages BBerg...

lol"

Thanks for that HH. I had a look at the twitter account, and in the true style of Donald J Gump, I nearly pissed myself laughing. Apparently money does not equate to good grooming or the yes men are afraid to tell them #uglycuntstthathaircannnothide.

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IPA
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May 11, 2017 at 1:59 AM ×

There goes the next shoe. I'll be covering another quarter tomorrow and trailing stops lower. TD, RY, CM, BMO.
If USD/CAD takes out 1.38 I'll take some off as well.

https://www.bloomberg.com/news/articles/2017-05-10/six-canadian-banks-cut-by-moody-s-over-consumers-debt-burden

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Leftback
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May 11, 2017 at 2:42 AM ×

Yes we've been watching and waiting for that one too, IPA. Punters will be piling on now into USDCAD, and we're just not sure if crude oil can soar like an eagle with CAD falling and all that lot going on in the Frozen North.

Good call from a few of the regulars here on Canada housing and banks. Not just right, but you timed it well too….

For a variety of reasons, LB will not be short the dollar for a while - despite disappointing US growth and irrespective of Janet. If CAD and CNY (and therefore AUD and BRL) are going to struggle while EUR is going nowhere, then short USD - it's a mug's game, innit guv. If you want a safe haven FX trade, long JPY might start to work soon.

VIX sub 10? Remarkable, but vol is all about the timing…. is this another version of 2007? We all knew what was coming in early 2007 but not how bad it was going to be - and plenty of tools didn't - so nobody knew we would have to wait until late 2008 for the dénouement. There are certainly plenty of tools out there - a generation of "passive investors" for a start. Yeah, Gundlach is right about that one. Not that "Vanguarding" isn't a great idea, but indexing has become mindless.

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Gus
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May 11, 2017 at 3:02 AM ×

Anyone snappin' up SNAP after hours? -23% face-ripper.

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checkmate
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May 11, 2017 at 8:18 AM ×

Sold the EM/DM equity summer position. Small loss ,but this is not looking like a fortuitous time to play that tactic.

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checkmate
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May 11, 2017 at 9:04 AM ×

Might be a bit early but I have reloaded the short FTSE today @ 7385 .Room for more aggregate entrys. The FTSE as basically done a 180 move recovering the entire pre French election dip. People short covering or sidelined and wanting to enter psot result have mainly done so. Hence, I like this entry.

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checkmate
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May 11, 2017 at 11:00 AM ×

I would say it adds to conviction on the short entry to see the large PM equity suddenly spring to life today and yesterday UK gilts looked a bit more perky. These have been havens as mentioned above when equity runs have become extended. Taken overall reinforces my view that the risk on dip buying is pretty much exhausted for the UK equity broad market. Needs more catalysts to run further at this point ,but where are they ? Not much of a forecast ,but let's imagine we see 'sell in May' in the media in the days ahead.

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Leftback
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May 11, 2017 at 7:24 PM ×

Crude seems to have run into a wall at $48.20, congrats to anyone who played that from the bottom, but it may be done.

Treasuries not getting killed - after somewhat weak 10/30y auctions - may turn out to be a bit of a tell. Dealers holding a lot of paper, so don't expect that paper to be sold for a few days…. more important US macro data on tap tomorrow.

Waiting for the media noise-o-meter to flip to "negative". It is May, after all.

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IPA
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May 12, 2017 at 3:34 PM ×

I don't think Crude is done, just pulling back before the next leg up. Those who missed Crude long off of 45.70 launch pad I talked about, there may be another opportunity @ 47.10

Don't blink!

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IPA
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May 15, 2017 at 6:15 AM ×

Well, 47.35 is all WTI could do on a pullback. Watch 48.05 for next possible opportunity to add (it is @ 48.61 as I type). Still holding 2/3 of my original position for 50 & 52 targets.

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Polemic
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May 24, 2017 at 9:27 PM ×

the use of whale oil has collapsed. But it is more expensive than ever to buy.

Supply and demand are complex beasts and a collapse in demand does not always mean a collapse in price.

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