Notes from Todd's Desk Feb 14, 2017
Themes we are following.
Oil
For a while we’ve followed the oddities in oil. To recap in brief, at $140 per barrel, the EIA reporting seems to get squiggly to us. Sort of fake glut squiggly. Followed by the 2014 Thanksgiving Day Massacre shutting in drilling for the better part of 2 years.
From a trading standpoint, it’s felt as though futures were used to suppress price holding down the recovery. If you want to dig, you can find reason to believe the US supply numbers could be high by 400 million barrels. In past writings, I've published an oilprice.com article which does a good job arguing the deficiency using tax data and there’s also an apparent discrepancy between OPEC global supply estimates and that of the West.
In my opinion, the shut in was the trigger for clean energy infrastructure adoption. EV, LNG, CNG are all ready to go. Now we just need a crisis to shift.
Baker Hughes global rig count is somewhere around 1700-1800 vs a historical 3000+ average for the past 20 years. So for the past two years we’ve been drilling to replace at 50 or 60 million barrels per day?
On the way out, Obama admin pushed for the release of oil from the SPR for “maintenance purposes”. Equivalent to sticking the heroine needle in the addict’s arm.
Trump is between a rock and a hard place. If he corrects the data or halts the SPR draws, oil spikes and the economy crashes; can’t take that needle out. We are addicted to cheap oil. His only out is to try to hope the SPR withdrawals hold down the price of oil until drilling and future production normalizes.
FOOD
Without going into a long form explanation, with HFT it’s possible to use small share trades very rapidly to gain similar pricing effects as acting with large constant volume. Short selling rapidly pushing through the bids forcing small buyers to stop out is an effective tool to drive down and suppress prices.
This seems to have been the tactic used to hold down corn and wheat. That’s done. Those trades seem to have begun normalizing.
Pricing pressure on restaurants’ inputs. Pricing pressure on groceries and processed foods are here as well.
Between food and oil inflation, those on SSI Disability, Section 8, and EBT are going to be pushed back into the workforce.
OMNIPRESENT TRUTHINESS
We’ve been following the era of omnipresent truth for a while. In ‘95 lingering emails became inconvenient for the masses. Now General Flynn is gone and Nuland is pretty synonymous with the Ukraine.
Trump isn’t going after the deep state. Trump just happens to be the guy in office when the era of truthiness fully illuminates the most secretive of indiscretions. Regardless of political affiliation, we are simply moving into an era of squealing cockroaches as everything is now fully illuminated. Yes, cockroaches squeal when illuminated. They just have to be human sized to be heard.
NON-CORRELATION
Happy to see sectors becoming less correlated. What was financials turned to oil & services, shipping and fertilizers. Now we are waiting on drug manufacturers, utilities and restaurants to come around to our valuation wheel house.
Enjoy,
Todd Krajniak
Toddkrajniak@krajniakcapital.com
Notes from Todd's Desk are just that. Nothing in here is a recommendation. You are smart, you can find the source documentation behind my assertions. If you can't then you probably shouldn't act on any thoughts within the post.