Observations at the heart of Permian basin

Office for the day. A proxy of view into the heart of the Permian basin as I get my car wheels aligned

The level of auto traffic along the Cedar Street, Pecos Texas is a very clear proxy on the health status of the US Oil industry.

Factors negatively impacting economic activities in the area:

  • US Elections: Oil companies operating in area put activities on hold awaiting for forthcoming mandate
  • Holidays: Demand for oil drops
  • COVID pandemic: Demand for oil drops

Responsiveness of lagging indicators:

  • Lag time between events and lagging indicators within the region is typically 24 hours
  • Layoffs can happen within 24 hours of environment triggers
  • Rapid hiring can happen within 24 hours of environment trigger
  • On occasions, rapid hiring and layoffs could happen simultaneously in different sectors

Qualitative background:

On mornings during times of Economic boom in the Oil industry, the Pilot center across the street could be observe lined with trucks rushing to fuel up as they go about transporting out their cargo to their destinations.

On such days, the empty parking lot in front of Custom Mufflers Tire Repair center could be seen filled up with trucks getting their wheels serviced.

With the election of President Biden, a bill was past that totally stopped all oil and gas related activities in New Mexico. This has resulted in the damping of traffic heading north along Cedar Street for the foreseeable future.

 

Observed second and third order impact of GameStop frenzy on market stability

Investment Funds market exposure strategies can be categorized primarily into three types.

Type 1: Long only strategy: funds that buy and hold positions.

Type 2: Short only strategy: funds that primarily borrow and short shares

Type 3: Market neutral strategy: funds that hold half their position in long and half their positions in short attempting to gain from some form of arbitrage between performers and losers.

To increase profit funds would typically be leveraged. Levels of leverage is dependent on how aggressive each individual fund is. Long Term Capital Management for example, a fund that went bankrupt in 1998, was leveraged up to 20X for some of its positions.

During a recent frenzy co-ordinated efforts by Redditers bid up prices of stock symbols like GameStop and AMC. From a fund management perspective, funds belonging to Type 2 and Type 3 were heavily impacted by this black swan event. As losses in their short positions mounted, many received margin calls from their lenders.

It is likely that Type 3 unwinded the bulk of their long positions to cover their margin calls. This had the net impact of driving down share prices of other unrelated stock symbols as observed in the US Equities sell off chart above.

Depressed share prices due to the unwinding of long positions by Type 3 lead to a follow on cascading effect where Type 1 had to unwind their leveraged long position.

This large scale unwinding activity could be inferred from the inverted yield curve observed on 31st Jan 2021. This inversion could also be interpreted as funds opting to maintain liquidity levels by moving heavily into positions like short term US Treasury and cash as they await for the market gyration to settle.

The last time the yield curve was observed to be extremely inverted was on 26th Feb 2020, during the initial onset of the COVID-19, pandemic as illustrated below

That was rectified when the Federal reserve lowered interest rates to 0% and started quantitative easing on 13th March 2020.

The dichotomy between privacy and health

1984: Big Brother is Watching
Across multiple literature, its been stated privacy versus health will be one of the primary dichotomy societies around the world will need to juggle with as technological advances are made in the fields of artificial intelligence, communications (surveillance) and medical science (genetic research).
 
What is surprising was the rate at which the Corona pandemic catalyzed this change. In light of this, it is fascinating to observe how different societies position along the spectrum. Some societies has opted for surveillance to the maximum extend possible with current technology while others opted for its polar opposite going to the extend of staging mass protests against it use. 
 

Related readings:

  • The AI Economy, Roger Bootler
  • To Be a Machine, Mark O’Connell
  • Irrational Exuberance, Shiller, Robert J.
  • Life 3.0: Being Human in the Age of Artificial Intelligence, Max Tegmark
  • Mind Children The Future of Robot, Hans Moravec
  • The Singularity Is Near, Ray Kurzweil
  • 1984, George Orwell

Observations on our news reporting system as well as investment bank forecasting.

On the quality news reporting

Good news reporting should seeks to inform rather than sensationalize with attention grabbing headlines. Its easy to appear data driven but still be misleading if you do not use the proper frame for understanding the numbers

An example of bad news reporting
An example of bad news reporting
An example of quality news reporting

On investment bank predictions

When on the receiving end of predictions made by external parties it is important to understand the underlying agenda they are trying to achieve. When examined thoroughly, predictions made by investment banks are so bad and contradictory, they should just stop making public declarations.

However if taking into account their objective is not to inform but to incite a trading decision by their clients so as to make a commission or offload losing positions on their trading books, it makes perfect sense.

Related references

Chat with Johnson and Dad on CoronaVirus and crisis investing

  • A company is only likely to go bankrupt if its creditors recalls debts and it is not able to pay back.
  • In the event of a major wide spread disaster and there is no one around to take advantage of it, it is unlikely the creditors recall debts
  • creditors of airlines would more likely want to have all their clients continue generating revenue with the planes to pay off debt than to foreclose of them and take back planes which are at that point worthless inventory for them
  • Labor unions will not want to have all their union members laid off, they will likely go into negotiations to deal with salary issues.
  • Ships of cruises are likely to deteriorate fast and require Capex to upkeep
  • Credit lines and payment schedule can always be renegotiated if impact is industry wide
  • If creditors are not willing to recall debts, then what would be the cause of bankruptcy? Beware of fake news that preach doom and gloom with no underlying basis
  • If you bought too early into the dip and you are more than half way into the dip might as well hold on for the recovery. Trying to exit too late into the dip will only cause more losses to be unnecessarily incurred.
  • Oil specialists are either producers or consumers, it is hard to determine the demand unless you are an insider
  • Wait till all the bad news are out and sentiment has turned before entering into position. Its ok to only go into position after the company share price has advanced 100% from its lowest levels.

Thoughts on the Corona Virus stock market crash

Key takeaways on White house press releases

  • White house has taken very decision steps since the start of the spread in China to limit the import of viruses within the US
  • It has followed through with further travel bans of air travel from Europe
  • The next step is the 15 day shelter at home notices as of 15th March 2020
  • Its a trade off between financial markets turmoil and health system turmoil
  • To reduce maximum potential casualties, White house has opted to drag out the time it takes for the virus to spread throughout the community through social distancing measures.
  • The process can be modified to have each state go through its own bell curve of peaking
  • When health facilities are not overload, healthcare workers can afford to provide the necessary level of care to patients so as to limit the number of fatalities
  • In times of crisis, democratic systems after much bickering will align and perform execution with tremendous velocity. Private sectors will get mobilized to deal with the crisis as well.
  • Crisis are opportunities to remove red tapes and refresh platforms that are otherwise outdated. This makes the system more robust and able to handle future scenarios
  • Media do not always accurately report what is the official communication from the White House. When possible always seek out the original communication.
  • Targeting to reopen the country by 12th April 2020, Easter

Stock market price actions

 

  • In prior two pandemics (2003 SARS, 2009 H1N1), the height of the shock was experienced during the month of March before a subsequent rebound was observed
  • Federal reserve announcements of interest rate cuts ironically caused markets to dip
  • During period of turbulence, euphoria and subsequent price spikes due to government promise of bail out will not be long lasting
  • Oil is a leading indicator
  • Percentage coverage of media on pandemic is also a leading indicator of drops in markets
  • SPY might go through periods of denial before acknowledging pandemic is cause for concern
  • Gold which is considered a safe haven during time of crisis will dip when traders experiencing margin calls on their equity positions start unloading their gold to fulfill margin calls
  • US Treasury yield curve will start steepening when Federal reserve starts lowering interest rates and performing quantitative easing
  • Gold and bond prices decline will quickly follow the steepening of the yield curve.
  • Global markets will experience sharp retreat as funds exit from global markets for US treasury when steepening compared to negative interest rates worldwide
  • US dollar exchange rates will start surging as liquidity exit from emerging markets
  • Execution of fiscal policies will usually lag monetary policies
  • Share prices levels of directly impact companies can be seen trading at
    • ratios on 19th March 2020
      • PE ratio: 1.5 – 2.5X
      • PB ratio: 0.25-0.30
      • Discount from peak: 80-90%
        • 2020 Corona Pandemic: NHCL, RCL, CUK, CAR, MGM
        • 2019 California forest: PCG
    • affected industries: cruises, hotels, airlines

Related references

 

Federal reserve rate cuts

3rd March 2020

  • reduce interest rates from 1.5-1.75% to 1-1.25%
  • purchase of government bonds
  • purchase of agency back mortgage securities

15th March 2020

  • reduce interest rates from 1-1.25% to 0-0.25%
  • effects are in very early stage within the US
  • First signs affected industries
    • Tourism
    • Hotel
    • Travel industry
    • otherwise not showing up in data but sentiment forecasts

Key take aways

  • mandate
    • maximum employment
    • price stability
  • Context
    • Economy propped up by US consumers
    • US unemployment is low
  • Dealing with corona issue
    • Actual impact of US economy is uncertain
    • Ultimate solution will come from health professionals
    • Broader spread of the virus is what changed hence potential risk to the economy
    • Uncertain how long the economy will take to recover
    • Health care, Fiscal and Monetary policies

Corona Virus versus SARS virus

2002 SARS outbreak

  • Fatality rate of SARS virus is 9.6%
    • Total infected: 8,098
    • Total deaths: 774
  • SPY from start to lowest is a drop of 11.28%
  • SPY ended SARS period 8.5% higher than starting period

2020 Corona Virus outbreak

  • Fatality rate of Corona virus: 3%
    • Total infected: 2900
    • Total deaths: 81
  • SPY from peak to latest dip: 2.02%

Ebola outbreak

  • Fatality rate of Ebola virus: 50%
    • Total infected: 28,646
    • Total deaths: 11,323

Related references