Large players volume is surging higher in the PowerShares DB Crude Oil Double Short ETN DTO. This is the seasonally weak time of the year for oil as the summer driving season comes to an end and demand for oil drops. Short sellers often target oil at this time of year.
PowerShares DB Crude Oil Double Short ETN
The surge in large players volume and the positive Twiggs Money Flow suggests the seasonal short oil trade is on for 2017. Playing the seasonally weak time of year by shorting oil is a bit more risky this year due to the increased probability that hurricanes will disrupt oil production in the Gulf of Mexico.
Russia expels US diplomats in retaliation for Congress increasing sanctions against Russia last week. Let’s just get it out of the way. Congress is stupid. Congress can’t act to help Americans who are suffering under a collapsing ObamaCare. Congress can’t help out Americans who are paying too much in taxes. Congress can’t even act to help the failing infrastructure across this country.
Folks I’m on the verge of exercising my constitutional right to take up arms against my government. Alright so maybe that’s not a constitutional right but it should be one! I’m thinking of Thomas Jefferson saying, “a little rebellion now and then is a good thing.”
Sanctions never should have been put against Russia for Ukraine. John “traitor” McCain and others in Congress worked with George Soros and the Obama Administration and used NGOs to destabilize Ukraine and oust an elected leader. It is illegal for the US government to use tax payers money to overthrow an elected leader.
Those inside the US government did it to gain control of the oil pipelines in Crimea and to move NATO missiles into the country to point at Russia.
Ukraine is right on the doorstep of Russia. How would we feel if China used NGOs to overthrow the government of Canada or Mexico so that they could control the flow of oil from Canada into the US and point missiles at us from across the border?
President Trump Is a Colossal Failure On Dealing With Russia
President Trump should have ended sanctions against Russia and apologized for what the former Administration and those in Congress like John McCain had done. Instead, Trump got manipulated by the Establishment like a school boy going to the restroom without a hall pass.
US oil has taken a big drop in after-hours trading on the night of July 6, 2017. Check out this chart which shows the big drop today.
As of 7:27 PM Pacific time in the US, oil futures were trading at $44.90.
As oil prices fall, it’s like a global margin call that goes out with sovereign wealth funds to either reduce their holdings in other assets or pony up more money to meet the margin call. This is why the direction of our markets are all about the oil.
US oil prices fell by more than 1 percent in the futures market with US crude futures dipping below $45 per barrel as news of a rise in production added to earlier reports that OPEC output was also on the rise.
Brent crude futures, the international benchmark for oil prices, were trading down 58 cents, or 1.2 percent, at $47.53 per barrel by 0137 GMT (9:37 p.m. ET).
Basically you have the US increasing production by 1 percent week-over-week to 9.34 million barrels per day. Year-over-year, that’s an increase of more than 10%.
With the US economy slowing, which will result in the global economy slowing, the demand for oil will eventually drop at the same time production is being increased. That’s a bad combination.
Low gas prices are not good for consumers or the US economy. Remember back in late 2015 and early 2016 when oil prices fell which pushed down the price of gas?
We had headlines in the MSM that lower oil prices were a big boost to consumers and so consumer spending was going to rise. It didn’t happen that way.
Gas Prices and Jobs
Lower gas prices mean lower profits for the energy sector which provides good paying jobs for millions of Americans. It’s not just direct energy sector companies either. Real-estate in and around major oil fields saw a crushing drop and mortgage default rates surged when oil drilling rigs went idol back in 2015 and 2016.
Lower gas prices are a net loss for the US economy because of the loss of jobs that accompanies the price drop. While we fell for the MSM headlines back in 2015 and 2016, let’s not fall for it again. Lower prices at the pump do not result in a meaningful increase in consumer spending.
Gas Prices Pull Down The Stock Market
Lower fuel costs pull down the stock market and not just in the US either but around the world. If oil prices were to average $40 a barrel this year, oil-exporting countries would have to sell upwards of $100 billion in various investments to cover their balance of payments deficits. We know this because it’s exactly what happened in late 2015 and early 2016 when oil fell.
It’s not just oil-exporting countries that would be selling. Oil is the primary holding of the world’s largest sovereign wealth funds. Those oil positions extend margin credit to fund managers who use that margin to buy appreciating assets around the world. When oil goes down, it’s like a giant global margin call that goes out and forces fund managers to reduce positions or infuse new money into the fund to meet the margin call.
According to JPMorgan’s estimates, a $40 average Brent price this year would result in the sale of $67 billion in government bonds, $24 billion in equities and another $19 billion in corporate bonds, hedge funds and cash over the course of the year.
Charting margin debt (red line), West Texas Intermediate (brown line), and the S&P 500 (blue line), you can see the effect that oil prices have.
Notice how oil leads both margin debt and by extension the S&P 500.
Not only does the black gold pull down the stock market via the reduction of margin debt, it also results in lower earnings and hence the earnings recession we experienced in 2015. You can see this relationship by charting S&P 500 earnings (green line) over the price of oil and margin debt.
Oil began plunging in 2014 and that drop showed up in earnings about 6 months later. Notice that when oil turned up in February of 2016, earnings again turned up about 6 months later.
Low gas prices are not good for consumers or the US economy. Traders need to watch the price of oil. It’s all about the oil. So goes oil, so goes the US economy.
Lance Jepsen of GuerillaStockTrading has issued a trader alert regarding oil prices. So goes oil, so goes the US economy.
Traders and investors are looking for a continuation of strong earnings to justify high stock valuations, now trading near their highest levels since 2004.
Most of the expectation for a recovery in earnings is predicated on oil prices being around $47 to $55 a barrel. If you don’t get those numbers, you do not get the strong earnings the stock market needs to warrant the high S&P 500 P/E ratio of around 25.
U.S. crude futures have been pressured lower by a supply glut. They’ve averaged over $48 per barrel so far this quarter, however, traded around $43 on Friday and are down over 20 percent from February, when they hit an 18-month high.
U.S. stocks are in the ninth year of a bull run that has been fueled of late by bets on pro-growth policies from U.S. President Donald Trump. But with the timetable for reforms extending further into the future, earnings are regarded as a crucial support for stock prices.
Revenue expectations have dropped for 10 of 11 industry groups since early April.
The benchmark S&P 500 stock index as a whole is expected to deliver 7.9 percent profit growth, down from 15.3 percent in the first quarter, and below the 10.2 percent forecast in April, Thomson Reuters data shows.
While lower oil prices can help some sectors such as industrials and transports, as well as boosting consumer sentiment, high expectations for earnings growth mean any stumble will be felt broadly.
Energy industry profits are seen up an incredible 683% from a year ago according to Thomson Reuters data. Without energy, profit growth estimates drop to 4.8 percent for the quarter.
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A weekly Saturday financial show that attempts to predict market direction for the week ahead by looking at a variety of fundamental and technical charts. This week’s show features commentary on the plunge in oil markets, the largest CIA release in history called Vault 7, China’s increasing manipulation of our media in the US, Mexican George Ramos’ claim that the US is not “theirs” meaning “whites”, and the growing danger of a globalist soft coup against the Trump Administration.
There has been heavy insider buying in Gran Tierra Energy that began on November 9, 2016. On November 29, 2016, Director David Smith bought $90,000 worth of stock. Also on November 29, 2016, Susan Mawdsley bought $60,000 worth of stock. Again on November 29, 2016, Officer (VP, Investor Relations) Rodger Trimble bought $37,500 worth of stock.
Gran Tierra Energy Stock Chart
Comments: Nice swing trading chart. Short-term swing target price is $3.08 or higher. The insider buying came after Gran Tierra submitted winning bids totaling a combined $30.4 million for two blocks which Ecopetrol S.A. (“Ecopetrol”), Colombia’s national oil company, offered as part of the Ronda Campos Ecopetrol 2016 (“Bid Round”) in an electronic live auction held on November 25, 2016. Gran Tierra’s winning bids are for the Santana and Nancy-Burdine-Maxine Blocks, which are located in the Putumayo Basin.
Disclosure: I do not hold any position in this stock.
Looking at the aggregate supply (AS), aggregate demand (AD) model, we can see where the US economy is currently at in the economic cycle. It is critical that traders and investors understand where we are at in the business cycle so as to be in on the right side of the trade. Timing Bull/Bear cycles and sector rotation is a critical skill for traders.
Stage 1: The economy is at full employment, Q1 where AS1 (aggregate supply) intersects AD1 (aggregate demand) at a price of P1.
Stage 2: The Great Recession hit causing a demand shock, shifting the aggregate demand back to AD2. Consumers reduce their spending and businesses reduce their investment. The new equilibrium is a recessionary output of Q2 at a price of P1. And the result is a recessionary gap equal to Q1 minus Q2.
The Great Recession had a wicked negative feedback loop or multiplier effect.
In the graph above, phase one is an aggregate demand shock, which leads to $100 billion in unsold goods from a reduction in aggregate demand. In phase two, this leads to a cutback in employment and wages. While in phase three, this leads to a reduction in income. Now assuming a marginal propensity to consume of 0.75, we see a reduction in consumption of $75 billion in phase four. This triggers a cutback in sales and further cutbacks in employment, and the process continues to go around in a negative feedback loop.
Stage 3: Wages, prices, and interest rates fall, as a result of the recession. This causes aggregate demand (AD) to move downward, along the aggregate demand (AD) curve.
At the same time, the supply curve (AS) shifts out to AS2, as firms hire more workers, and expand output. Together, these price and wage adjustments drive the economy back to full employment at Q1 and close the recessionary gap, but at a new and lower price of P2.
We are currently at Stage 3 where the trouble is that aggregate demand (AD) is not increasing at a fast enough pace.
Increases in government regulation, taxes, and ObamaCare on businesses, shifts the AS curve inward and thus reduces AD.
The Federal Reserve’s goal of QE was to increase AD.
The figure above shows how an expansion of the supply of money causes a rightward shift of the aggregate demand curve from AD to AD prime. Note that in the range of this shift; the aggregate supply curve is relatively flat. This Keynesian range reflects the presence of unemployed resources and recessionary forces. In this region, we get a very small increase in the price level from the Federal Reserve’s expansionary monetary policy and a large increase in real GDP as equilibrium moves from E to E prime. This is exactly what we saw with the larger increases in GDP in 2010 through 2012.
The Fed decided to expand the economy even further and tried to push the aggregate demand out even more to E double prime. This is well past the economies level of potential output or potential GDP. Here, the slope of the aggregate supply curve turns steeply upward. In this fully employed economy, the higher money stock would be chasing the same amount of output so that the major impact of the Fed’s expansionary policy would be to significantly raise the price level, with little increase in real GDP and this is where we are currently at in the economy.
The next stage is that the Federal Reserve wants to see the price level (CPI, PPI) rise which would indicate the time to raise interest rates. We are starting to see the CPI and PPI move higher. I think this is largely from the recent rise in the price of oil. The move higher in the CPI and PPI would have happened a year ago if it were not for the crash in the price of oil which caused disinflation. The process of the Fed raising interest rates is as follows.
The Fed reduces reserves R, through open market operations which causes the money supply M to contract, and interest rates I, to rise. In the GDP formula (GDP = C + I + G + (Exports – Imports), this interest rate rise, not only reduces investment I, but it also reduces consumption expenditure C and net exports. The cumulative effects of a fall in I, C and exports are to push aggregate expenditures or aggregate demand down in doing so real GDP and inflation likewise go down, thereby achieving the desired policy goal.
Source: A special thanks to Dr. Peter Navarro, Professor, Paul Merage School of Business, University of California for which this article would not be possible. Go here to find out more about my favorite economics professor.
Watch out for investing in high yield corporate debt. U.S. default rates are surging higher and breaking away from the rest of the world.
The U.S. has more oil and gas firms that are financed by the high yield bond market than anywhere else on the planet. The S&P calls these oil and gas companies the “weakest links.”
Accommodative Federal Reserve policy (ultra-low interest rates and lower lending standards) caused a lot of borrowing by smaller oil and gas companies profiting from the shale oil boom. When the price of oil crashed, S&P downgraded the credit rating on lots of that debt to B- and lower.
Now you see why many oil and gas executives are using the mainstream financial media to disseminate fantastic stories of oil production cuts by OPEC members. The goal is to jawbone the price of oil higher. No one is going to cut production when oil prices are this low because they have to produce more to make up for the budget shortfalls caused by the lower price of oil. Remember the law of man: when things get bad enough, it’s every man/country for himself.