Oil And The Black Swan - The Final Countdown

Dec. 21, 2015 10:10 AM ETXLE10 Comments
David Nelson, CFA profile picture
David Nelson, CFA


  • Bad news for stocks always starts in debt markets.
  • The day OPEC died.
  • Stocks in lock step with crude.

By David Nelson, CFA

It's been a little over a year since I published the first in the series, Oil & the Black Swan. Just days' earlier Saudi Arabia had announced they would no longer be the world's swing producer willing to cut production and support oil prices. There hasn't been a funeral or even a death certificate issued but effectively that was the day OPEC died.

The collapse in oil has been a favorite topic for the press and bloggers at times even approaching the attention garnered by the Federal Reserve. The rhetoric that followed ranged from; "it will be a tax cut for consumers" to others saying "it's the end of life as we know it." Of course it's the extremes that rarely get it right and the truth usually lies somewhere closer to center.

Bad news for stocks can come from almost anywhere but the really challenging concerns always show up in debt markets first. A year ago, I focused on the credit default swaps of leading oil companies as well as the sovereign debt of OPEC's largest producer Saudi Arabia. As you might have guessed with oil down 67% from its June 2014 highs, the picture isn't any brighter. Saudi Arabia's war against the U.S. energy complex to maintain market share is coming at a steep cost. CDS spreads are starting to rise along with the cost of protection.

The cost of insuring these bonds is climbing dramatically with each leg down in energy markets. When portfolio managers are forced to focus on balance sheets it's never a good sign and today you can bet it's the first place we turn. No one wants to be caught off guard holding a Chesapeake (CHK) or even worse a Magnum Hunger (OTCPK:MHRCQ). (Magnum Hunter has

This article was written by

David Nelson, CFA profile picture
David Nelson, CFA is the Chief Strategist of Belpointe Asset Management. The members of his firm, DC Nelson Asset Management LLC (DC Nelson), recently merged into Belpointe. At Belpointe he will continue to manage his Alpha Select Portfolio. He is a Chartered Financial Analyst (CFA), a designation issued solely by the CFA Institute (formerly the Association for Investment and Research or “AIMR”). Follow on Twitter @davidnelsoncfa Relevant Experience: David founded his own investment firm in October 2000. Prior to forming DC Nelson, David was a portfolio manager at Lehman Brothers’ New York City office, where from 1997-2000, he was responsible for managing the assets of high net worth clients and small institutions. Lehman approached David at Morgan Stanley Dean Witter where, from 1995-1997, he played an active role in management at their flagship New York City office. Previously, he was a Financial Consultant for Merrill Lynch. He is a frequent commentator and guest on Fox News, and Bloomberg TV where he discusses markets, politics and individual securities. David also frequently lectures on the financial markets, including several recent appearances before the American Association of Individual Investors (AAII). David’s investment career follows his well-publicized success in the entertainment industry where he performed with recording artists The Turtles, David Johansen and Nektar.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

All pictures and charts created by me in Bloomberg or Photoshop.

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