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PM End of Week Market Commentary – 2/19/2016

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  • Mon, Feb 22, 2016 - 04:34am

    #11

    Penny551

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    “Imminent Collapse”

We here at PP have a terrible record for assuming "the end is nigh" – me included – so now I'm trying to see what the guys on the other side of the hill are doing.  In a change from my analysis in prior years, I no longer assume things will simply proceed to their inevitable (and near term) doom without effective counter-measure attempts by our friends at Central Planning.

Admittedly, I've been guilty of being in the "Imminent Collapse" crowd for enough years to -unfortunately- lose a good deal of credibility w/ some less informed friends/family.  I think a lot of us have underestimated the influence of TPTB to affect "markets" and keep the ponzi going.  We all know here that it WILL come to an end, but timing it seems to be a fools errand.  

More recently, my solution has been to keep the majority of assets positioned for the "big reset" and speculate w/ a small percentage of the rest based on the clear patterns we've seen over the past few yrs.  So based on more recent precedent, they probably will come up w/ another "can kick" and smack the metals lower and rally the "markets" a little in the short term. So short term, I'm using a little spec money (that I can afford to lose) to short the metals/GDX and be long a few stocks.  Several yrs ago I would have thought that was blasphemy, but have learned to take the emotion out of it put the extra earned "fiat" into the other forms of capital Adam/Chris talk about.

  • Mon, Feb 22, 2016 - 05:43am

    #13

    davefairtex

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    deleveraging gold

Mark-

Yeah, that dropping gold price is the "2008 replay" scenario.  That would be true for most commodities that are traded on a futures exchange, at least theoretically.  Glencore, DB, and/or other banks in trouble are potential candidates for causing this to happen.

In looking back at the charts, there were two distinct cycles of falling gold prices, once when the wave of commodity prices peaked in July 2008, and another that seemed to start in early October that led to a $200 drop in gold prices in just 10 trading days.  The deleveraging period was this second phase, I believe.

Gold actually spiked higher on the Lehman bankruptcy – from 750 to 900.  In looking back, I'm not exactly sure there was a specific driver for the October sell-off in gold.  Certainly everything else was selling off at the same time, and it did appear that gold bottomed long before most other things.  My guess: a whole bunch of banks were in deep doo doo at the time, so they were all selling whatever they could to raise cash.

Here's a pretty good timeline for the 2008 crisis: http://lauder.wharton.upenn.edu/wp-content/uploads/2015/06/Chronology_Economic_Financial_Crisis.pdf

 

  • Mon, Feb 22, 2016 - 06:01am

    #12

    davefairtex

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    shia = Iran

http://www.pewforum.org/2009/10/07/mapping-the-global-muslim-population/

Iran is 95% Shia, Iraq 70%, and Yemen is 40%.

Saudi Arabia is 15%, Syria 20%, Turkey 15%.  Ultimately, the Shiites will not be able to govern Syria regardless of what Russia does, any more than the Sunnis could hold Iraq once Saddam fell.

I still don't see Syria as existential for Saudi Arabia.  That viewpoint sounds a little like the old "domino theory" reason for fighting in Vietnam.  The issue for SA is SA itself, and the price it gets for its oil.  The rest of the stuff is just a "would be nice" outcome.  If and when shale is destroyed, SA will be more than happy to bring oil prices back up again.

And a revolution in SA will not be a Shia revolution, not with only 15% of the population.  And I think US territorial guarantees for SA are still good, so Iran isn't really a threat to "carve off" the Shia population.  Plus the Pakistani nuclear weapons program that the Saudis paid for.  They're still good too.  Pakistan is Sunni, 85%.

Its all about oil, and its price.  And at some point, near term, it will bounce, unless we have some massive banking disaster in the meantime.  (And – would that be in the Saudi interest?)

It is possible that WW3 will start in the gulf with Russia and Turkey and SA and Iran all mixed up in there.  I think the more likely outcome is a bounce in oil, and an attempted rescue (somehow) of the DB and the Italian banks.

  • Mon, Feb 22, 2016 - 07:38am

    #14
    Peak Prosperity Admin

    Peak Prosperity Admin

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    Iran = shia

For SA. Syria, like Yemen,  is all about Iran,

Perhaps were talking about different time scales, but what I see is  a potential 'state' change, in the (liquid to gas sense) not domino theory.  Syria is critical to that. Furthermore, regardless of Assad's continued presence post 'peace' the Iranian influence will remain with whomever the nominal successor Russian client is.

I don't dispute the sectarian distribution numbers, I would argue that for SA the goal is to roll back Iran  who is credibly  vying to be the regional hedgemon,   it's about the Shia Crescent and the empowerment of the the disenfranchised Shia relative to the legacy power structures in the Mid East. and yes ultimately that is about Oil.

By your strict distribution numbers logic, Saddam could not have used the Sunni minority to rule over Iraq's Shia majority and the Assad's, a tiny Shia offshoot sect in minority Shia Syria, could not have held power all those years there.

It's about power, control, influence and the changing balance.  

Having said, that I don't disagree, that a revolution in SA is not the 'Shia taking over' per se,  The vulnerability is more analogous to the Arab Spring,  with  a variety of, constituencies, young people, radical Sunni Islamist including Al Qaida, and other flavors.

But a revolution is a revolution, and the strategic and geographic significance of the Shia there and in nearby Bahrain is important.  I could easily see the Shia obtaining autonomy  in the East if the Kingdom goes down to revolution.

Saudi Arabia's foreign adventures and stoking the fires of sectarianism  is aimed as much at their internal Sunni  foes, in attempt at diverting attention, co opting these constituencies  'negative energy' to retain control  domestically.  losing the fights they picked  would not play well domestically and could be a proximate trigger for internal revolt.

Iran has the potential to help foment and exacerbate that revolution.  Were not talking about Iran invading SA here. 

As to the territorial guarantees of the US  relative to an internal revolution. they would have about the same efficacy as our support of the Sha of Iran did relative to their revolution.   Likewise the nuclear option doesn't work as domestic crowd control. 

I'm curious since you brought up shale patch  being destroyed as a factor in turning down the pumps in SA,  do you reject Chris's take that due to the difference in Crude's and refining capabilities, the two grades are not actually competitive?  Or does the fundamental fungilbity of energy trump that distinction?

Having said all of that,  I don't dispute that at some point oil price may well jump, It is a relatively small marginal surplus.  Not sure if that will ultimately save the Saudis nor am I convinced that will save the banks either. Especially in light of the deflationary wave that just seems to have started.

mememonkey

 

 

 

  • Mon, Feb 22, 2016 - 07:46am

    #15

    davefairtex

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    XLF 2008 timeline

Trend is down in the US equity market, and in the economy, so that's what we have to look forward to going forward.  But in re-reading the 2008 timeline, I am reminded of just how dreadful the series of events were that happened during that period.

Its worth re-reading, just to remind us all how relentless all the bad news was during that time.

Compare it against what is happening right now.  Our central banker friends have not yet really even started trying.  I do think the pacing of this thing is a little faster, but if you look at how price has moved, we haven't even seen a "Bear Stearns" event yet.

XLF is off about 25% from its peak.  That has taken 7 months.  In 2008, that same thing took 9 months.  I've drawn in where that might be on the 2008 timeline and the performance of XLF – financial company ETF.

  • Mon, Feb 22, 2016 - 08:44am

    #17

    davefairtex

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    Silver below support: off -0.34 to 15.03

Silver has dropped below its "previous low" at 15.11…its dangerous when it drops below support like this…

 

  • Mon, Feb 22, 2016 - 09:03am

    #16

    davefairtex

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    point by point

Perhaps were talking about different time scales, but what I see is  a potential 'state' change, in the (liquid to gas sense) not domino theory.  Syria is critical to that.

Yes.  I'm not talking grand strategy that plays out over the next 5-10 years, I'm talking what happens in the next few months.

Having said, that I don't disagree, that a revolution in SA is not the 'Shia taking over' per se,  The vulnerability is more analogous to the Arab Spring,  with  a variety of, constituencies, young people, radical Sunni Islamist including Al Qaida, and other flavors.

Right, ok.  My sense: SA's greatest protection against an internal Sunni Arab Spring are higher oil prices.  With oil profits, they can buy off their "variety of constituencies" as they always have.  Low oil prices are therefore the existential threat to the House of Saud – far more than some distant Sunni-Shia struggle in Syria.

Saudi Arabia's foreign adventures and stoking the fires of sectarianism  is aimed as much at their internal Sunni  foes, in attempt at diverting attention, co opting these constituencies  'negative energy' to retain control  domestically.  losing the fights they picked  would not play well domestically and could be a proximate trigger for internal revolt.

Sure, that's a theory.  Can you state a historical case where "losing the fights they picked" resulted in revolution?  Perhaps Bolshevik revolution?  That was after a 3 year war where lots and lots of soldiers died.  Current case is a pale shadow.  A counter-case is US in Vietnam: in America, as you no doubt recall, it was remaining in that war that caused internal revolt and it was the retreat from Vietnam that brought internal peace.  If they "declare victory and go home" as we did, it might all end happily.  Who can say?

Having said all of that,  I don't dispute that at some point oil price may well jump, It is a relatively small marginal surplus.  Not sure if that will ultimately save the Saudis nor am I convinced that will save the banks either. Especially in light of the deflationary wave that just seems to have started.

Again, planning the grand sweep of history – financial and geopolitical – is not my goal.  Who gets saved is irrelevant.  Whether SA can succeed is irrelevant.  I'm looking at a set of near term actions that taken together would spike gold down to 1000 in the next few months.  Actions taken would be believed to be in the near-term best interests of the players involved.  That's my case.  What actually happens, and what the ultimate success of the policy happens to be, is "above my pay grade" and outside the scope of the case I'm trying to make.

Saudi could decide to turn off the oil spigot for a variety of reasons.  Central planners could (and probably will) put forth a short-term plan to try and save DB and the Italian banks.  The two, together, might well bring a temporary semblance of calm to the marketplace that would cause a counter-reaction to the big gold spike higher we've just seen.  It happened three or four times during the 2008 crash.

It is possible – in fact, the more I write, the more I'd rate "something happening" in those two areas as probable – it just remains to see how those actions will end up affecting price of gold.

Armstrong has gold possibly topping out end of Febrary/early March.  That's the timeframe I'm talking about.

If such a thing transpired, I'd definitely "buy the dip" to 1000, much as Tom is preparing to do.  As to why he's hiding in tall grass – it's not like the little gold coins will flee in panic if they spot his approach.  🙂

FWIW, I sold my GC contract before market close on Friday.  Price action didn't look great.  I meant to go short silver, but somehow…trade didn't execute, much to my chagrin when I woke up today and saw it down.  That COT report definitely got me nervous.

  • Mon, Feb 22, 2016 - 09:14am

    #18
    Peak Prosperity Admin

    Peak Prosperity Admin

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    final thoughts

One final thought on timing. 

We stand on the cusp of a potential  and imminent Saudi/Turkish invasion in Syria, that would in all likelyhood spike oil prices, even as it spikes gold. 

Even in the absence of an actual invasion, I don't see how you can entertain a 'near term'  pumping slowdown rapprochement scenario between Saudi's and Russia, in light of those recent developments.

Also  I am still curious about your position on Shale oil market share  as competitive to Saudi Oil market share  vis a vie Chris' position on the subject?

 

Ok with that  I'm going to take my geopolitical grand strategy crystal ball and go back home to the Neo Con thread before I start to feel too much like the proverbial geopolitical turd in the gold trader's punch bowl.

Thanks for playing though!

 

mememonkey

  • Mon, Feb 22, 2016 - 10:40am

    #19

    thc0655

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    Stalking gold $1,000

Like you say, you've got to try to take the emotion out of it.  I'm being stealthy, alert and most of all patient.  If I'm not, all I'll end up with is $1,190 gold or maybe a whole lot of nothing.  And, yes, I DO think the prey has seen my approach and scampered away up the price chart.  Most recently, I gave away my position to silver at $13.80 when I twitched and almost bought some.  I have to apologize to everyone here for scaring those little coins back up over $15.00.  Here's me stalking $1,020 gold and $13.25 silver:

  • Mon, Feb 22, 2016 - 01:03pm

    #20

    davefairtex

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    sphere of influence

Pretty clearly, Syria is within the Turkish sphere of influence, and quite outside the Russian sphere of influence.  Much as Russia claimed the Ukraine region as their backyard, so Syria is Turkey's backyard, and all those same arguments apply.  Turkey cares far more about the outcome there than Russia, and so they have more motivation to end up going to the wall for their objectives.  Is Russia equally as motivated?  Ultimately, I don't think so.

The case I would cite that I believe is on point is China & Korea, vs America and Korea.  China cared a whole lot more than we did; even though they didn't have the bomb, they were willing to go to the mat when the US invaded North Korea.  Presto: a shooting war between America and China on Korean soil.

However: the world did not come to an end.  America retreated, a compromise was struck, and then all was well, more or less.  (My reductive description of the Korean War).

So, nothing world-ending, AND SA and Russia definitely have a shared interest in higher oil prices, regardless of the other stuff going on.  US and Russia had tens of thousands of warheads pointed at each other, but managed to come to agreement on matters of common interest.

Regarding Bakken oil – what does google say?

Question
What is the API gravity of Bakken crude oil? Explain its relative quality.
Answer

Bakken crude oil gravity ranges from 36 to 44 degrees API. The quality of this oil is excellent, almost identical to WTI. The benchmark crude oil is West Texas Intermediate, which is 40 degrees API sweet crude. It is the benchmark because it requires the least amount of processing in a modern refinery to make the most valuable products, unleaded gasoline and diesel fuel.

Most of it sounds like the good stuff; no discount for light sweet crude.  All the refineries are happy to take that, supposedly.

There is a grade of oil called North Dakota Sour, but my reading of the articles suggest that the sour oil is in the minority.

There is limited pipeline capacity out of the region, and so the oil has to be shipped by rail.  If they sell oil FOB north dakota, there's a $7-$10 discount because of transport costs.

In googling around, I found a wiki that listed maybe 100 oil products.  Apparently, specific gravity and sulfur content are the two characteristics that matter.  You want a high specific gravity, and low sulfur.  WTIC has exactly that.

https://en.wikipedia.org/wiki/List_of_crude_oil_products

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