European economic weather map

The latest Financial Times economic weather map for Europe shows a further substantial deterioration since it was last published in October, when the devastating impact on the global economy of the collapse of Lehman Brothers, the investment bank, was only just becoming apparent.

Oil Traders Seek Another 10 Supertankers for Storage

In the psot "Things to look at for 2009H1" (posted on 5 December 2008), I suggested that one thing to look at is the cost of tanker will pick up as the need for oil price arbitrage. Indeed, some people are looking into this matter recently as an investment opportunity.

By Alaric Nightingale

Jan. 7 (Bloomberg) -- Oil traders are seeking as many as 10 supertankers to store crude, potentially taking the amount hoarded at sea to almost five days of European Union demand, according to Frontline Ltd., the largest owner of the vessels.

About 25 of the carriers, each able to hold about 2 million barrels of crude, were already hired for storage. There are enquiries for 5 to 10 more, Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today. Traders are storing crude to take advantage of higher prices for supply in the future.

Thirty-five supertankers represent about 7 percent of the global fleet of very large crude carriers, according to data from London-based Drewry Shipping Consultants Ltd. Storing oil in tankers may buoy rental rates that fell by a record 78 percent last year as slower economic growth sapped demand for energy.

“I’ve never before seen storage demand on this scale,” said Didier Labat, a Paris-based shipbroker at Barry Rogliano Salles who has worked in tanker markets for about 20 years.

Commodities prices fell the most in five decades last year, with crude dropping more than $100 from the peak of $147.27 a barrel in July, as simultaneous recessions hit the U.S., Europe and Japan. Oil demand in 2008 fell for the first time since 1983, according to the Paris-based International Energy Agency.

Traders are seeking to lease ships for three to nine months, Jensen said. Crude oil for December delivery traded at $61.90 a barrel as of 10:49 a.m. in London, $13.66 more than the February contract. Oil companies and traders may be able to profit from storing the oil, assuming shipping, insurance and financing costs are covered.

Supertanker Rates

A supertanker would cost about 90 cents a barrel a month for storage depending on the length of the rental, according to data last month from shipbroker Galbraith’s Ltd.

Iran, the second-largest member of the Organization of Petroleum Exporting Countries after Saudi Arabia, idled as many as 15 of its biggest ships in May to store crude oil. That contributed to three consecutive months of higher rental rates for ships.

The cost of delivering Middle East oil to Asia, the world’s busiest route for supertankers, rose yesterday for the first time since Dec. 5, according to the Baltic Exchange in London.

Forward freight agreements advanced. The derivatives are used by traders to bet on the future price of hauling Saudi Arabian cargoes to Japan, an industry benchmark.

The contracts traded at about 46 Worldscale points for the fourth quarter, according to prices from Oslo-based broker Imarex ASA as of 10:34 a.m. London time. They closed at 45 yesterday.

Tanker Index Gains

Worldscale points are a percentage of a nominal rate for more than 320,000 specific routes. They give owners and oil companies a starting point for negotiating hire rates without having to calculate the value of each deal from scratch.

Frontline, based in Bermuda, has advanced 13 percent in Oslo trading this year. The five-member Bloomberg Tanker Index has gained 12 percent.

EU oil consumption averaged 14.86 million barrels a day in 2007, according to data from BP Plc.

Inflation and Industry Returns - A Global Perspective

Inflation plays a prominent role in global equity portfolio selection. While there is a substantial literature on the relation between inflation and aggregate stock returns in single markets, there is littleevidence on the effect of inflation on industry returns from a global perspective. In this paper, we investigate the interaction between global inflation and global industries. Sensitivities to inflation vary significantly across industries and tend to be higher for noncyclical industries than those of cyclical industries. Consistent with previous research, we also find that the negative relation between inflation and stock returns tends to diminish or becomes positive when longer horizon returns are examined. Longer term inflation information is more relevant for investors when considering equity investment decisions. Based on inflation sensitivities, we propose an inflation timing model which outperforms a global benchmark index. As global capital markets and economies become more integrated, we expect industries and inflation to be considered in a global context. Strategies such as the one we propose should be well suited to benefit from such integration.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1321440

Things to look at for 2009H1

Here are the things that I personally believe will be the interesting areas to look at for the first half of 2009. In the investment world, always good to be an early bird...

1. The fundamentals of commodities are unimpaired even since the credit crunch and the deepening of the economic crisis. Farmers cannot get loans for fertilizer now. Minners cannot get loans to open new mines. Oil companies are delaying or cancelling projects for oil exploration and developments. So we are going to have some serious, serious supply problems before too much longer.

2. Again, the shipping industry will probably benefit from the widening of oil price contango (the future price is higher than the spot price), as investors might be in anticipation of profit from higher oil prices in the future and book the tankers with options to use them as storage facility. Therefore, the shipping cost will probably bottom up from their current low level.

3. Another interesting idea is to look at British Pound. Since reaching a 26-year high of $2.1161 in November 2007, the currency has dropped 30 percent. In the past two decades, the five major declines in the pound averaged about 22 percent from peak to trough against the dollar, according to data compiled by Bloomberg. it is possible that the pound’s recent 26 percent slide may be coming to an end. So be aware of any non-negative developments in the economy in the coming weeks, there might be signs for entering the long side of Pound.

4. The current crisis has exposed severe shortcomings in banks’ ability to cope with a drying up of liquidity, largely because their reserves were insufficient or held in debt instruments that proved impossible to sell when the market turned. In an effort to boost banks’ liquidity reserves, the regulators around the world would probably recommend a proportion of banks' assets should be in the form of highly liquid government bonds. This would have a far-reaching impact. as many institutions will need to significantly reshape their business model over the next few years as a result. Therefore, highly liquidity assets, especially government bonds will be better off as demands pick up.

Bear Alarm: Market Timing Works, It Reduces Risk, Not Return Potential

I recently developed a market timing indicator called "Bear Alarm", which tends to be successful in identifying those major market downturns in history. The strategy based upon the "Bear Alarm" indicator is constructed as follows: when the "Bear Alarm" is on, put the money into cash (I assume a zero return on cash in the historical back-testing, equivalently putting all your money under your bed, if you don't trust the banks during trouble periods); when the "Bear Alarm" is off, put the money into the market. Here I have run the historical back-testing for S&P 500 for the last 20 years, and Dow Jones Industrial Average for the last 100 years. For S&P 500, the Bear Alarm Timing strategy returns 13.4% per annum while S&P 500 returns 8.8% per annum for the last 20 years. For Dow Jones Industrial Average, the Bear Alarm Timing strategy returns 11% per annum while Dow Jones Industrial Average returns 5.8% per annum during the last 100 years.