C.M.O. 6.05.2009
Credit Market Overview
June 5, 2009
We used to call my Grandfather “Baba” and he used to call oil, “erl”. Regardless of what you call it; after an initial pop in late March and a bit of indecision in back end of April the “black gold” made from dinosaurs bones, has done a pretty good imitation of someone running up an escalator.
The reasons for oil’s rise have been pinned on things like the burgeoning economic rebound, a U.S. consumer that, while not out of the I.C.U., seems to be off life support and the same dollar substitute thesis that held sway from around these exact levels in August of 2007 all the way to $145′ish in July of last year.
Much was made of “speculator’s” nasty deeds during that run as hedge funds bought OTC upside participation products (UPP if you need an acronym to start your weekend; and not a bad name for a family of double and triple long ETF products) and sell side firms sold them and then used the futures contracts to hedge themselves, thus calling themselves hedgers and able to elude other nasty things like position limits.
The resulting fall from grace took “Texas tea” down to the low $40’s earlier this year before news that China might be the first patient checking out of the hospital brought it back to where we are today.
Around this time of year we also start to get early forecasts of what the hurricane season is supposed to bring. This is where it gets a bit interesting; higher oil prices are welcomed at the moment because of what everyone wants to believe that means for the global economy crawling out of its hole. Were oil to move higher on fears that another Katrina were on the way it would portend a less welcomed reason i.e. drag on the economy and the market’s reaction would be less sanguine.
As things go, the forecasts for the 2009 Atlantic hurricane season running June 1 through November 30 at an ocean near you, by Philip J. Klotzbach and William M. Gray of Colorado State University’s Department of Atmospheric Science, are predicting 11 named storms in 2009 vs. 14 in 2008 and a total of 50 named storm days compared with 70 last year.
From this it would seem that any move higher in fossil fuels will be in anticipation of things more economic than atmospheric so eyes, once again, look east to see what the new big consumer of raw materials on the block is doing. We know from the Secretary of the Treasury’s visit that the People’s Republic and what is soon to be called the “Republic of the People” are pretty much in synch with where things are from a currency prospective so, in a very rare occurrence, watching the price of “erl” might just be a single factor model of how the world is doing. Just might are the key words here but stranger things have happened.
CDS spreads in the energy sector continue to narrow and as I wrote earlier this week a good portion of the longs in the CEC Portfolio are located in this area.
With that much exposure in one sector the above reasoning might be “talking my book” but at least you know I’m thinking about it.
Enjoy the weekend.
Jim Delaney
