INSTANT INSIGHT | Oil Prices, US Dollar & Credit Risk

Takeaway: While oil prices bounce back and forth on oil production "freeze" talks, we think the dollar will strengthen pushing Oil prices lower.

INSTANT INSIGHT | Oil Prices, US Dollar & Credit Risk - Oil cartoon 11.20.2015

 

Since the February lows, oil has rallied massively. Why? Look at the U.S. dollar. The CRB index of commodities has a 30-day inverse correlation of -0.88 vs. the US Dollar.

 

So where do we go from here?

 

Our Macro team elaborates on this point in a note sent to subscribers earlier this morning:

 

"Whether it’s output cut rumors into this weekend’s meeting or declining U.S. production, the “bottom is in” headlines are at the top of commodities feeds from every major news source with WTI +40% in the last 3 months.

 

However, looking at contract positioning shorts, a crowded consensus short positioning has been washed out (crude, nat. gas, gold, silver positioning all registering z-scores >1x on a TTM basis) with money betting on a continued decline in the U.S. dollar.

 

A supply side floor argument is a fundamental story, but not a catalyst, and we would reiterate that the credit risk priced into commodity leveraged fixed income is considered all but gone in market-price terms."

 

In other words, look for dollar strength pushing crude prices lower.

 

While we're at it, a quick note on commodity-leveraged credit risk...

 

On The Macro Show this morning, Hedgeye Senior Macro analyst Darius Dale points out that U.S. high-yield bond issuance is down -53% year-over-year in 2016.

 

Yikes! Certainly not a vote of confidence.

 

Meanwhile, as Hedgeye Macro analyst Ben Ryan pointed out in "The Unintended Consequences Of ZIRP On Commodities" earlier this year:

 

"Using a sample of 34 different producers in 4 different sub-sectors, commodity producer debt as a % of corporate credit outstanding has multiplied ~2.5x in 10 years. This group’s aggregate debt level is up ~5x in 10 years. The chart below shows the jump in commodity producer debt as a share of aggregate corporate debt levels." 

 

INSTANT INSIGHT | Oil Prices, US Dollar & Credit Risk - commod leverage

 

The critical question to ask yourself... How much longer can it last?


GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more