Saturday, January 10, 2015

Financial Relativity Metrics Signal Deflation Troubles for Stocks in 2015

The first full week of trading in 2015 has shown a trend that is likely to be the harbinger for the year as a whole – volatility fueled by a tug of war between deflationary fears and hyped growth expectations in the U.S. economy.  In this type of environment, option trading or taking short-term positions can make you a investing super-hero one day, and a goat the next.  Trying to stay the course as a long-term stock investor will be difficult for those who are more risk-averse.

The known variables which can readily be used to grasp where stocks will gravitate in 2015 are much harder to decipher than the past two years.  The reason it is getting more difficult is that stocks have now entered what I call the “borrowed time” phase of valuation expansion.  Many of the economic variables that are strongly correlated with continued inflation of U.S. equity prices are now stressed and the signals are growing that a deflationary pressure release sell-off is in store for the U.S. equity markets.  The seven major metrics I use to make this assessment are highlighted in the table below, and are backed by on-going research explained in my book – Theory of Financial Relativity.

The financial metrics as 2015 begins are increasingly cautious, as exhibited by the number of yellow and red markers. The model over the past two years has become progressively more “colorful.”, another way of saying the trend is not your friend at the present time. Based on the research I have done in each categorical area, I expect more of the metrics to reach a red level before the stock market is likely to undergo a sustained severe downturn. The increased areas of caution in many of the metrics, however, set 2015 up in my opinion to be a very volatile year for equity values, with a likelihood of a major intra-year drop at some point.

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Thursday, January 8, 2015

Saudi's Oil Shock Therapy Hits Permian Trust Hard

The price movement in Permian Trust units (PER) since the beginning of September 2014 thru the beginning of January 2015 has been dramatic, dropping from over $12 per unit settling at just above $6 per unit at the 1/5/2015 close.  The severity of the move can be traced primarily to an adjustment in the market to a radical downward shift in the expectations for future oil prices.  During the summer months as the price of oil spiked up above $110 per barrel on geo-political tensions, the market sentiment was that $100 oil was here to stay, and that there was an implied floor of about $90 per barrel below which spot prices in the market would probably not breech.  However, during September rumblings in the industry began to surface that the Saudi’s were going to change the playing field.  The resulting “oil shock therapy” reverberated throughout the industry, affecting most severely the drilling services and E&P companies in the U.S. shale oil industry. 

Permian Trust units, which are heavily dependent on the future price of crude oil, were driven down in traded value because of the expected price shift.  The price movement can be visibly traced in the following chart.

One of the more intriguing aspects of the chart is the defense of $6 as the current floor as the price of oil has approached $50 on the front month contract.  Is this a potential sign that the market is entering a bottoming phase?  Or, is there another leg down possible, and if so, what is the fair value of the Permian Trust Units if this happens?  This report provides insight about the expected change in intrinsic value of the Permian units as the price war continues.