The Big Picture |
- Peter Pan, Oil & Portfolio Management
- 10 Monday PM Reads
- The countries that have been hardest hit by extreme weather
- Missing Alpha
- Holiday Gift Guide for Your Favorite Hedge Fund Managers
- 10 Monday AM Reads
- Disrupting Cancer
| Peter Pan, Oil & Portfolio Management Posted: 09 Dec 2014 02:00 AM PST “Peter Pan, Oil & Portfolio Management”
Magic ensued when Mary Martin flew across the stage as Peter Pan. The audience was spellbound, and Broadway theater soared to a new height in wonder. The fog of this memory parts for me to recall her flying across the stage, arms out, one leg bent, a brilliant smile, and the uplifting of her voice and song. What a wonderful world where kids never age and the threat of time is reliably revealed by a tick-tock from a crocodile. This storyline entices children and seduces adults back into their youth. In Neverland, things are so clear. The good guys win and the bad guys lose. Heroes and heroines are easily identified. In Peter Pan there is hope for the future world. Fantasy with a magical story, like Peter Pan, is still fantasy. The issue for investors is whether we can actually be optimistic. Is there a pleasant outcome that may yet surprise us as we proceed through this dangerous and fear-inducing world? Or is there a negative outcome ticking ominously like Tick Tock the Croc? I personally believe that hope is not an investment strategy. I believe that while fantasy may be pleasing or threatening, it is only pretend. So please do not consider the rest of this commentary a forecast. The purpose is to identify some possible risk/reward surprises. During a recent interview with Johanna Bennett of Barron's, she asked what might be the single biggest surprise that is not priced in the markets. What is totally unexpected? I thought of two, one positive and one negative. Each has portfolio management implications. The negative surprise may evolve but is certainly not priced in now. It would be a full-blown currency crisis like the one we had in the 1990s. Coincident with an abrupt oil price decline, violent currency adjustments are taking place (examples are ruble and yen weakness and dollar strength). Emerging markets are impacted, though their debt spreads do not show it yet. In the US, high-yield spread widening is limited to the energy patch right now. Is this a warning? Is the market ignoring another warning in the investment-grade bond sector? Does the widening of the baa bond spread versus low level of VIX indicate trouble coming? These are usually aligned. (Hat tip to Carsten Valgreen of Applied Global Macro Research.) Will energy credit trouble lead to shocks like the Long Term Capital Management (LTCM) blowup in 1998? What would central banks do in 2015 if they had to confront a currency crisis, spread widening, and banking system risk? The central banks are already at the zero bound. Collectively, they have already tripled their balance sheets. The potential positive surprise is also sourced in the falling oil price. It just might yield a peace dividend. Johanna asked how that is possible, with ISIL, Boko Haram, Shabbab, and Al Qaeda and with news events from Ferguson, New York, Los Angeles, Raqqa, and Yemen. With all that is going on, she asked, how is it possible? No one believes it is possible, I said. We are besieged by violence on a daily basis. That is why markets have zero anticipation or expectation that any of the nasty and horrible events in the world are going to stop. Like the market, I have no anticipation or expectation that will happen. Peace breaking out seems to be a fantasy like Neverland or flying. Portfolios and investment strategies are designed with the idea that politics and governments are poorly convened, impoverished, and worsening. The globe seems to be a threatening and deteriorating place. That assumption underlies asset allocation strategies. The notion that peace could break out seems far-fetched to any reasonable person. We certainly are not betting real money on that outcome. But is it far-fetched? Maybe, just maybe, there is a long-shot possibility that the Saudi Arabians dropping the oil price to $60 per barrel and keeping it there might just induce some reduction in violence. They may deliver a form of a peace dividend that is not obtainable by using drones. Why? The oil price at $60 per barrel impacts the naughty folks more than the friendly folks. The naughty folks – Iran, ISIL, Vladimir Putin, Nicolás Maduro in Venezuela, Al Qaida funding sources, and other culprits –are all negatively impacted when oil is at $60 per barrel, if the low price is sustained. Cheap oil denies revenue for many bad actors. Having less money undermines their ability to make mischief. Now let's be very clear. I am not convinced that, in the halls during the discussions in Riyadh, this topic was the premier reason to keep the price low and production high. But I am also attributing to Saudi Arabia enough intelligence and foresight for them to realize how threatened they are. They may have thought through what it would mean to hold the oil price low. Maybe, just maybe, there is another beneficial aspect from the decision of the swing producer in OPEC (Organization of the Petroleum Exporting Countries). Remember, the Saudis have the ability to put the oil price wherever they want and keep it there for a while. Their current production rate is 10 mbd (million barrels a day). The US is approaching 9 mbd, up from 5 mbd only a few years ago. These two countries with a common interest in their security now produce 19 of the world's 87 mbd of oil. No other actor comes close. So, the remote, unlikely, and impossible long-shot prediction for 2015 or 2016 is that global violence may actually diminish. It will not disappear but it may lessen. That is if $60 oil undermines the bad actors and makes them weaker and more vulnerable to response from their domestic populations. Hope is not a strategy. But we can have a wish list. We think that currency and political turmoil is coming in Venezuela. We hope the good people win. Putin is under pressure; the ruble is plummeting. We hope the good people win. Iran now has to face the worst of all circumstances: inflation, falling revenue, sanctions, and economic pressure. We hope the good people win. ISIL and Boko are rotten murderous bastards. Gradually the world is coming around to mounting action against them. We hope the good people win. In Ferguson, there are many who do not burn buildings and who try to balance household budgets. Cheap energy helps them. We hope the good people win. Cheap energy means more economic growth, more jobs, and more spending power in the hands of many. Maybe that lessens violence. We hope the good people win. Remember, this is not a forecast. Hope is not a strategy. I'm as cynical and fearful as everyone else. But, the long-shot negative surprise, not priced in markets, is a global currency war that grows out of oil at $60 a barrel and other factors. And the positive surprise comes from the same oil price. Wouldn't a positive outcome be something? Tick Tock the Croc gets his bad guy. And the good guys do better. Like Peter Pan, we could be flying. PS. We just passed December 7. This is an anniversary of the worst kind, the surprise attack on Pearl Harbor that started World War II. PPS. Our media labeled the attempted rescue in Yemen as "failed." Shame on American TV. 40 well-trained American servicemen traveled with very high risk and attempted a most difficult rescue, yet the hostage was killed by his terrorist captors. Of course, it would have been better to succeed and have him alive. But stop and think about it for a minute. What other country in the world would mount such an effort to rescue its own citizen and others who happen to also be there? No failure in my book. The attempt is testimony to what makes our nation distinguished above the others. ~~~ David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors: http://www.cumber.com |
| Posted: 08 Dec 2014 02:00 PM PST My afternoon train reads:
What are you reading? Will Cheap Oil Lead to Big Mergers?
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| The countries that have been hardest hit by extreme weather Posted: 08 Dec 2014 12:30 PM PST
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| Posted: 08 Dec 2014 09:30 AM PST
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| Holiday Gift Guide for Your Favorite Hedge Fund Managers Posted: 08 Dec 2014 07:00 AM PST Thanksgiving is behind us, and we are in full Shopmas mode. By now, you should have already made up your list of who has been naughty — overcharging for subpar performance — and who has been nice (those rare alpha-generators). Reward them accordingly. Let your favorite 2&20-er know exactly how much you appreciate their work with a thoughtful bauble or two. In our mad consumerist society you can remind these folks that their efforts are appreciated by choosing just the right gift from our hand-curated selection. Disclosure: Just like last year, all of the items on this list are selected by your humble scribe, free from the interference of the PR flacks and other media manipulators who haunt my e-mail inbox. No compensation is accepted for these recommendations. Here are my picks, gift-wrapped with a touch of snark, to help you play Santa to your favorite hedge-fund manager. • “The Art of McCartney” ($23) This is the easiest trade you will make all year: two CDs of 46 songs written or sung by Paul McCartney — as a Beatle, solo artist or with Wings — performed by a Who's Who of musical talent. Part of the fun of this album is trying to guess which artist is covering which song. A DVD of how this project came together is also good fun. Spoiler alert: Some favorites include “Let It Be” by Chrissie Hynde of the Pretenders; “Junior's Farm” by Steve Miller; an inspired choice of Kiss playing “Venus And Mars/ Rock Show“; and the incredible vocals of Roger Daltrey on “Helter Skelter.” Senior fund managers of the baby-boom era and millennial traders alike will find something to love in this collection. • “Breaking Bad: The Complete Series” ($255) Give your favorite "bad" manager the complete series — 16 Blu-ray discs should help any manager lagging his benchmark to relax during off hours. They might even interpret some themes from the show as a warning of what happens to underperformers. The box set is loaded with lots of extra commentary, interviews with cast and crew, out takes and more. Sure, you can stream “Breaking Bad” at no extra charge on Netflix, but that's for proles and office admins. • “Triumph of the Optimists: 101 Years of Global Investment Returns” ($123) The first book to show comprehensive evidence of the long-term equity risk premium. Required reading for the fund manager on your gift list who hasn’t quite hit their benchmark, but is close. • The Bay+ Oru Kayak for the (heh heh) active manager ($1,495) A 12-foot, 28-pound kayak that folds into a 28" by 32" box for easy transport to anywhere you need to be in order to stay above that high-water mark. Never let your favorite leveraged-fund manager find themselves up a river without a kayak (paddles sold separately). 
• Clean shave: Moustache month is over, and unless you’re a 1970s porn star, it’s time for a smooth shave: Start with Billy Jealousy Hydroplane Super-Slick Shave Cream ($20) to lubricate your skin for less irritation and fewer nicks, or Musgo Real Shave Cream ($15). Use your favorite brush to lather this up straight out of the tube. After the shave, soothe the skin with Kiehl’s Calendula Herbal Extract Alcohol-Free Toner ($21). Finish it off with L'Occitane Cade Baume Apres Rasage ($34), with its light, non-greasy shea butter formula. • LifeSpan TR1200-DT5 Treadmill Desk ($1,350) Keep the weight off your favorite fat-finger trader with this treadmill trading turret. If your manager is putting up great numbers, but putting on the pounds or has other health issues (high cholesterol, blood pressure), don't let that alpha-generator slip away to the great beyond. Keep him here for a few more years with this top choice of PC Magazine. Perfect for the aspiring "active" fund manager. (Bloomberg terminal not included). • Music of the Season Here is the soundtrack to this year's holiday party: Start with “A Charlie Brown Christmas,” by Vince Guaraldi ($7). The jazz soundtrack exudes the pure holiday magic of the original animated holiday special. It has become a quirky, humorous favorite that warms the soul. Then get the party moving with “Holiday For Swing” by “Family Guy” creator Seth MacFarlane ($10). A Christmas confection of McFarlane and a 52-piece orchestra, it brings to mind the best holiday cheer of Frank Sinatra, Dean Martin and Bing Crosby. Finally, he may be serving 19 years to life for second-degree murder, but that doesn’t mean you can’t enjoy “A Christmas Gift for You from Phil Spector.” (Thanks for the e-mails about last year's “Ella Wishes You a Swinging Christmas“).
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| Posted: 08 Dec 2014 06:00 AM PST The holiday season is now in full swing, but it won’t interfere with our morning train reads:
What are you reading?
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| Posted: 08 Dec 2014 03:30 AM PST
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