Commentary:
It may be time to start building pro-risk positions. I’m not saying we’ve seen the low necessarily, but a preponderance of the data suggests that the risk reward is favorable.
First, per Quantifiable Edges, this is the most bullish week of the S&P in the past 30 years:
Here is similar information in chart form, via @NautilusCap:
Second, the Vix has exceeded the 21 handle. That has marked the either the extreme or came close to marking it, over the past two years:
Third, option adjusted spreads on High Yield Energy corporate bonds in the 5yr HY CDX index are now at double digits. There are various ways to back out default probabilities from that, (and I’m not a credit specialist, so this is probably not exact – readers are welcome to correct me) but by one quick and dirty method, assuming that various CDX assumptions apply including a recovery rate of 30%, the market is pricing in around a 50% default probability – basically a coin flip. That number can obviously go even higher, but an actual 50% default rate for the entire sector would be pretty extreme. For reference, the historical peak for realized speculative defaults (across all sectors) using Moody’s data from 1970 to 2002 is 12.8%.
Also, the discount in spot WTI prices relative to the long term marginal cost are close to levels that have historically allowed prices to stabilize. This argument is a bit weaker than the others, mainly because marginal costs are subject to fluctuations as well as uncertainty. The last time apparent supply/demand was this imbalanced seems to have been the late 90’s, when WTI sold off ~56% on a month to month basis, though that was after a 27% rally from the range highs. From the prior range highs, the sell off was around 45%. The early 2000 recession caused oil to sell off ~42%. We’re currently down 46%. I’m not saying in any way that oil has found a bottom, but I do think that for value investing folks, prices have probably come down enough for value buyers to be entering oil-related investments here.
Notable:
- Japan Tankan Outlook Survey ticked down to 9 vs 13 exp and prev.
- US Empire Mfg declined to -3.58 vs 12.4 exp and 10.16 prev
- NAHB Survey declined to 57 vs 59 exp and 58 prev
- ECB QE is widely expected by investors according to Bloomberg. More than 90% of respondents to a Bloomberg poll predict ECB bond buying, up from 57% in the last survey. Bloomberg
- Bundesbank chief criticizes Europe’s decision to give France more time to hit budget goals – London Telegraph
- OPEC will stand by its decision not to cut output even if oil prices fall as low as $40 a barrel and will wait at least three months before considering an emergency meeting, the United Arab Emirates’ energy minister said.
- Abe’s Liberal Democratic Party and its junior partner, the Komeito party, won 326 seats in the 475-member lower house, enough to maintain its “super-majority.”
Upcoming:
- Mon: RBA Minutes, China HSBC Mfg PMI,
- Tue: EU PMI, UK CPI, German ZEW, US Housing Starts, Markit Mfg PMI, Japan Trade Balance
- Wed: BoE Minutes, UK Employment, US CPI, Oil Inventories, FOMC, SEP, NZ GDP
- Thu: German IFO, US Jobless Claims, Markit Services PMI, Philly Fed, NZ Business Confidence, UK GfK Consumer Confidence
- Fri: German GfK Consumer Confidence, Canada CPI, Retail Sales
- Mon: US Existing Home Sales, EU Consumer Confidence, NZ Trade Balance
Global Macro Trading 