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Graduated from Moscow Technical University as MS in Electrical Engineering and from Canterbury Business School (Finance, 1996). Started my investment analyst career as a secondee at HSBC James Capel (London). Then returned to Russia where dedicated personal development to mastering report... More
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  • The US DoE's Stance To The Crude And Distillate Inventories Vis-à-vis Hurricane Sandy: The Winner Takes It All?
    The US DoE's Stance to the Crude and Distillate Inventories vis-à-vis Hurricane Sandy: The Winner Takes It All?

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    It's no longer a news that on Thursday NYC authorities imposed gasoline rationing on motorists in New York City and Long Island a day after a nor'easter added to the woes of a region still grappling with the damage left behind by last week's Superstorm Sandy. The orders from Mayor Michael Bloomberg and Gov. Andrew Cuomo will be enforced Friday morning and restrict private car owners to buying fuel for their vehicles on either odd- or even-numbered days, depending on what's imprinted on their license plate numbers. Taxis, public transit, and emergency vehicles, including ambulances, though, are exempt from the order. As we know, New Jersey authorities put similar restrictive rules into effect last week. Apparently, these initiatives resulted from huge gasoline and diesel fuel shortage embracing the Tri-State Area and some other adjacent States. Popular media references to closure of the Sea ports (Hurricane Sandy prompted the U.S. Coast Guard to shut the ports of Boston, Portsmouth, New Hampshire and Portland, Maine) as the main culprit of the acute deficit don't look particularly convincing, since the much needed carburants could have been delivered by petrol lorries. This raises questions over the position of the DoE, which keeps building up crude inventories - apparently, at expense of underutilizing fully operational oil refineries, while stockpiles of the badly needed gasoline and distillates are either overtly declining or creeping up at a snail's pace in case of the Midwest (PADD2) configuration (see Fig. 1 and Fig. 2).

    Fig.1. DOE Total Increase of Crude Inventories vs. Decline of the US Refinery Utilization Rate

    (click to enlarge)

    Sources: DOE, API

    Fig.2. DOE Distillate Low Sulphur Diesel Fuel Inventories' Change

    (click to enlarge)

    Source: Bloomberg

    Hurricane Sandy resulted in the loss of electric power to about 8.5 million customers on the East Coast and the shutdown of two refineries (Hess in Port Reading, NJ with operating capacity of 70,000 bbl/d, and Phillips 66 in Linden, NJ with operating capacity of 238,000 bbl/d), as well as major petroleum distribution terminals and certain pipelines because of power outages and flooding.

    US Energy Information Administration (NYSEMKT:EIA), the DOE's research body, expects higher average fuel bills this winter in states east of the Rocky Mountains. A return to a near-normal winter is considered the main driver of higher heating expenditures. Projected changes in residential prices from last winter include 2% higher heating oil prices.

    Forecast average household expenditures for heating oil users are at their highest level in record. Meanwhile EIA, as if nothing big happened, expects U.S. total crude oil production to average 6.3 million barrels per day (bbl/d) in 2012, an increase of 0.7 million bbl/d from last year. Notably, according to their latest report dated November 7, there were almost 673 thousand customers without power in the affected States. This represented an increase by 22 thousand customers earlier reported as a result of the Nor'easter sufferers' addition to the original affected households and businesses in the aftermath of the Hurricane Sandy. Back in the 1990s, storm victims suffering power outages simply lit candles and waited for power. Today, only portable diesel generators promise to keep life relatively normal even during extended outages. As a result, now all these affected people are in urgent need for heating and diesel oil, so without immediate restorations of crude vs. distillates balance, the latter prices are poised to skyrocket as soon as freezing winter conditions arrive.

    On November 6 EIA updated its report on the Retail Motor Gasoline Supply in the New York City Metropolitan Area. EIA estimated, based on an emergency survey of gasoline availability, that 24% of gas stations in the New York Metropolitan area did not have gasoline available for sale. No biggie again?

    Such an odd attitude is really hardly explainable. One of the likely possibilities that global traders are considering is EIA's strict adherence to its pre-election mandate to keep the crude prices low by means of building excess inventories. Again, this is just one of the many wild assumptions circulating in various Internet traders' blogs these days. Apart from maintaining a bull or a bear stance on oil, most traders are concerned about sustainability of the current price trends. Sudden price spikes and collapses caused by unexpected swift recoveries of distorted fundamental balances - are equally unwelcome for the trading people.

    The typical inverse relationship between the price of crude oil and the value of the U.S. dollar returned in October. The U.S. dollar index decreased by 1.7% in September while Brent crude oil prices dropped by nearly $2 per barrel (1.6%) over the same time period. In October, the value of the dollar started to recover, which coincided with declines in the price of the front month Brent futures contract (Fig. 3).

    Fig. 3. Brent Crude Oil Price vs. Value of the US Dollar (DXY)

    (click to enlarge)

    Sources: Intercontinental exchange, CME Group


    The storm struck at an already delicate moment for the regional market, with stockpiles of motor and heating fuel being at unusually low levels explained above. Also the "effect of backwardation" on the oil futures market was the one to blame: the more futures prices decline the less motivated the end-buyers become to hold inventories because future prices are cheaper than current ones.

    For instance, PADD 1B gasoline inventories hit the lowest level on records dating back to 1991 in the week to Sept. 28. They have risen by 3 million barrels since then, but remain still 10% below the 5Yr average, according to DOE data.

    PADD 1B distillates stocks - which includes heating oil and diesel, and is a particular concern ahead of the winter - are now 45% below the five-year average. Stockpiles hit their lowest level since May 2008 in the week to Oct. 12.

    The bottom line: the US stockpiles are at their historical lows, oil refineries has been increasingly underutilized and discouraged, while consumer demand for heating oil and diesel jumped at least twofold. Guess what's going to happen next?

    Nov 21 7:24 AM | Link | Comment!
  • In Search Of True Reason(-s) Behind The US Equities’ Erratic Behavior

    Drilling down the most market-sensitive irritants, one can note that China's slowdown and Iranian geopolitical factors somehow show less and less impact on the daily indexes' fluctuations. Previously predominant significance of the US quarterly earnings has also been apparently losing its former appeal: among the operating winners and losers this time there is no consensus about where their stock prices should go. Apart from obviously staged, and thus misleading "positive" report by the Bank of America, such stocks as Alcoa (NYSE:AA), JP Morgan (NYSE:JPM), Yahoo! (NASDAQ:YHOO) and many more evidently deserve a better destiny based on their quarterly reports. So what's the deal, why the last stronghold of the market common sense - the US stocks - begin demonstrating such a faulty performance?

    Apart from ostensibly great frustration about lack of QE3 (we are still reluctant to believe that absence, rather than presence, of something is capable of spoiling the investors' mood this much), the trouble may have come from Spain. In fact, even after this Thursday's proof of lack of drama, if not success by the Spain's 2 Yr and 10 Yr €2.5 bn ($3.3 bn) bonds placement, business media keeps pointing to the fact that the country's borrowing costs increased based on its yield uptick to 5.743% compared with 5.403% at its debt auction in January. Spain's debt sales have been under close scrutiny as the market doubts over the ability of the Spanish government to reduce the budget deficit to the agreed-upon 5.3% of GDP in 2012 has pushed its 10-year yields above 6%, a level that is seen as unsustainable in the long run. The surge in yields to levels unseen since before the European Central Bank's first three-year refinancing operation (LTRO) has fanned fears that Spain might be the next country to plead for bulk external help, although several euro-zone politicians have defended the government's deficit cutting and reform efforts.

    Beats me, we don't see any Armageddon prediction in the rising yields alone, for it seems to be absolutely normal to link a country's cost of capital to its bona fide economic good standing - exactly the way this rule exists in the corporate world! Money managers are tired of subpar fixed income interests, and eagerly go after any no-nonsense yield offering as exemplified by the Spanish auction's triumphal bid-to-cover ratio of 3.3, compared to a ratio of 2.0 in October. So here again we face the dilemma of how to treat the glass half-filled with water. No-one says that Spain's economy is fine and bullet proof, but studying Spanish budget revenues while matching them against its ongoing external payments, we don't see any reason to worry up until at least upcoming July (see Fig. 1):

    Fig. 1 Timeline and Structure of Spain's Government Debt Interest Redemption in 2012, € bn

    (click to enlarge)

    Source - ECB, EuroStat

    The Spanish government has also made several reassuring statements that, first of all, it could seize control of faulty finances in regional governments, which account for about 1/3 of public spending in Spain, and to segregate financial "toxic" assets apparently intending to act as copycat to the US Feds back in late 2008. Since that auction, Spain has also sold a €4 billion tranche of this bond via a syndicated tap. The average yield on the 2014 bond came in at 3.463%, compared with 3.495% at the previous auction Oct. 6 (again, we don't see a trace of hinting at the infamous Greek scenario in that modest number change, especially for the maximum yield of 3.52% on the 2 Yr bond was in line with the previous 3.519%). This is perfectly illustrated by the Spanish sovereign bond yield curve compared with its German peer (see Fig. 2):

    Fig. 2 Spanish sovereign yield curve vs. German sovereign yield curve: now vs. 1 month ago

    (click to enlarge)

    Source - Bloomberg

    So far we don't see any particular deviation from the market normalcy. As German economy slightly improved over the course of the past month, the Spanish macro indicators somewhat deteriorated, and this fact is reflected in relative heights of the corresponding yield curves. Also the smoothness of the curves (unlike their apparent roughness in the case of the pre-IMF-funds-disbursement Greek Hellenics with distinctive 1 Yr peak pointing at climax of the bondholder's default worries) means there is nothing more than reflection of apparent fact, that German economy is better off compared with the Spain's. Again, what's the scoop?

    Finally, our alternative assumption of a reason the US stock market shows more erratic behavior is that the US economy doesn't look strong enough to secure uninterrupted market growth through the upcoming November Presidential elections. Below chart (Fig.3) illustrates that the S&P 500 index tends to grow during the US presidential election periods, except for well-explainable episodes of the rally disruptions caused by adverse factors such as notorious 2000 Florida election recount and 2008 world financial crisis:

    Fig. 3 Retrospective S&P 500 performance during the US Presidential elections

    (click to enlarge)

    Source - Bloomberg

    Apr 20 10:32 AM | Link | Comment!
  • Abandoned Toys: Supercommittee, Autosequestration And The BBB Debt

    While China's factor becomes the only real crystal ball of markets' hopes and fears, there are very few real experts to knowingly tap into the subject and enlighten all of us. In fact, the very style of actions and commentaries pronounced by the People's Republic leaders suggests that they don't have clear vision of their future steps either - in particularly, how soon they should apply their plentiful magic medicine to balance the apparently changing economic outlook. Just like in the case of dealing with artificially undervalued Renminbi, when "something had to be said" just for the sake of it with no real actions to follow, this time around Chinese leaders might simply be tired of the country's dull "World savior" mission and decided to quietly elaborate their "remanufactured" internal growth model, where 7.5% annual GDP increase would look more than enough to meet all the new targets. That sort of scenario would be a sheer disaster for the global markets which got entirely accustomed to China's locomotive role, and would feel exactly like a train of cars disconnected from the puffer in the midst of a dessert.

    Whatever happens, "hard lending" doesn't mean "quick lending". After HSBC published its lackluster China's March PMI, markets reacted as if tomorrow the world's fastest growing economy stops importing everything - starting with aluminum and ending with gold. Apparently, that would be a huge simplification, so we bet souring of the Chinese economic outlook is not the only (if not the main) factor that caused the broad market selloff.

    Looking at the S&P500 index futures we noticed their turning into steepening backwardation sometime in the beginning of this Spring:

    Fig. 1 S&P 500 Index futures curve on CME as of today, one and three months ago

    Source: Bloomberg

    To be fair, S&P 500 futures show backwardation about 75-80% of time as many portfolio managers simply keep playing Delta-neutral game, betting for individual stocks while hedging them by generic index futures. This means, first and foremost, that post-2008 markets' fear is still here, despite misleading slump of volatility. Basically, today's S&P 500 futures curves look somewhat resembling those contemplated a bit more than one year ago, with the main difference in the very steepness of the futures' curves:

    Fig. 2 S&P 500 Index futures curve on CME as of July 22, June 22 and April 21, 2011

    Source: Bloomberg

    In July 2011 Moody's Investor Services, not long before the infamous S&P's downgrade of the US sovereign rating, put the American rating on watch with negative forecast, which, apparently, meant that there have been 50% chance of the ongoing downgrade over the course of 12-18 months. Later, in November 2011 Moody's reminded that the "matter" is still on its agenda stressing on the likelihood of so-called "automatic sequestration" of the US Federal budget as No. 1 triggering event for the sought downgrade.

    There's more. As part of the deal ending the acrimonious debate over raising the national debt ceiling last August, the US president and Congress created the bipartisan Joint Select Committee on Deficit Reduction, commonly known as the "super committee." It was charged with finding ways to trim at least $1.5 trn from projected deficits over 10 years. Congress stipulated that formulaic spending cuts of $1.2 trillion would kick in automatically if the committee failed. Since then, we haven't heard of any progress in that direction, so we assume, the deal somehow just bogged down or simply lost its priority. This is exactly what bugs us the most eyeing occasional devilish Moody's reminders, that nothing has been erased from its agenda in this sense. We hear our opponents saying that Moody's downgrade would not be a catastrophe, just like S&P's one wasn't. Technically speaking, this viewpoint deserves certain consideration as rolling downstairs from AAA to AA+ didn't change the overall status of the US Treasuries and didn't even cause any noticeable volatility of their yields. Let us, however, not forget, that fund managers still use credit ratings as the main fixed income portfolio rebalancing tool. Most securities regulators permit using two discretionary agency ratings out of the major three to justify fixed income reallocation, so after S&P's infamous downgrade most of them simply switched to Moody's and Fitch ratings. This is in reality why nothing dramatic had happened ever since. Now imagine that not just one, but two out of three rating agencies had lowered their assessment of the US government debt. Would the safe haven preserve its notorious anti-rating resilience? Maybe, but only after the mass rewriting of the world's largest funds investment declarations.

    Formally, the final deadline to clinch the deal on the US budget cuts, so that the Fed thinly avoids hitting the foreign debt ceiling again, with all accompanying cries and tears, and tug of war we saw last summer, would be January 15, 2013. More realistically, the matter has to be closed some time this Fall, i.e. exactly in the middle of the US presidential elections. Apparently that would be a huge mismatch, so we believe the US Treasury Secretary would start knocking the legislators' doors as soon as this Summer urging "supercommittee" to step up and trim the budget. Since there hasn't been any major changes in the profile of main performers to this "superassignment" (Obama vis-à-vis the US Parliament) the outcome and the corresponding rating consequences might be painfully similar to those we contemplated in late July last year. Obviously, this could be viewed as a worst case scenario, but we don't see a lot of early signs of its rosiness.

    Apparently, the first victim would be the global stock indexes (in August 2011 S&P 500 fell around 19%) followed by commodities and currencies. Bonds would be traditionally less volatile, but many fund managers would hate repeating their 2011 embarrassment of seeking shelter in the instruments with effective negative yields. We tend to believe, that, since more and more fixed income fund managers understand that A-category debt looks hugely overpriced relative to B-category debt, this time they can opt to "fly" past the "six star hotels". Eyeing high odds of this way of unfolding events, we believe, it makes sense to start slowly closing our equities positions in favor of basket of quality B…BBB bonds. For those who don't like the manual pickup work, we suggest looking at a number of high quality relevant ETFs - particularly PBBBX (Advisors Series Trust - PIA BBB Bond Fund).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 23 12:04 PM | Link | Comment!
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  • Looks like commodities is a must-have stuff in your portfolio. Most other intsruments demostrate awry volatility.
    Aug 13, 2010
  • Good oppy to increase positions in physical commodities
    Feb 10, 2010
  • I am investing in variety of future bubbles at their early stages! :)
    Dec 3, 2009
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