Black Every Day?

nitro said:
First, let me state unequivocally that my models still point (SPX) higher [I have five models, two SPX and three Oil]. The following post is what I think, not what my models are telling me. I actually can't wait until they turn lower.

Debt distress level at highest since recession

"Higher interest rates are about to hit companies—just when many are ill prepared to handle them.

The Federal Reserve this month took interest rates up for the first time in nearly a decade—ending the days of free money. It might take a few years for higher rates to hit companies—as they look to refinance debt. But the troubling part is many companies aren't in great shape to eat the higher costs.

The number of companies with the lowest credit ratings and negative outlooks jumped to 195 in December, the highest level since March 2010, says Standard & Poor's. The biggest culprit for the jump in these so-called "weakest links" is the oil and gas sector, which accounts for 34 of them. But financial companies are close behind, representing 33 of the weakest links, says S&P.

The bond markets are starting to factor in the dangerous combination of rising interest rates as well as profit weakness in several sectors. The U.S. distress ratio - a measure of the amount of risk the market has priced into bonds - hit 20.1% in November, which is the highest level since hitting 23.5% in September 2009, says S&P. That's an onerous indicator since September 2009 takes investors back to the last recession..."

http://www.cnbc.com/2015/12/28/debt-distress-level-at-highest-since-recession.html
More...


I agree with the bearish views in the longer term, but for now, which do you trade? Your model or your thoughts?
 
Big turnaround in oil later in the day "explained" by storm in the North Sea

storm.jpg


Oil up 2% on North Sea Storm; rig count falls by 2

http://www.cnbc.com/2015/12/30/oil-ends-2015-in-downbeat-mood-hangover-to-be-long-and-painful.html
 
nitro said:
My model at the time of this writting says FV for SPX is ~2115 - the two models give ~2107 and ~2124. However, it is sort of blind to bad credit and other "hidden" risks. It isn't that I don't know these are risks, it is that I don't know how to incorporate it in model terms.

My oil models are giving a mean price for oil at almost exactly where it stands. The two models give $32.06 and $40.57, with a mean $36.31 which is almost exactly where it is trading. I understand how it arrives at the two prices, but neither of those handle credit risk very well. I doubt $4 down on oil will cause huge more stress to oil debt. Oil going up will likely be bullish for most markets so that is not the worry with my current positions. But $10 down more would probably devastate a huge part of the sector, and with it add risk that my models are blind to.

My positions are definitely aiming long, but I am uncomfortable with it, particularly since it requires me to add to a losing position. This is extremely risky in way out of whack markets.
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The models now have this risk incorporated into them. I will post "FV" numbers for each soon.
 
  • WTI "FV" ~32.60
  • SPX "FV" ~2050.00
These numbers have a first attempt at quantifying credit risk in both emerging markets and oil credit, particularly the SPX model(s). It is important to understand that the SPX model does not use the oil model as a predictor. Instead it uses the real oil price. If it did use the model oil price, SPX model "FV" would probably be close to where SPX is trading (although I think SPX is oversold in the short term and oil is overbought.) Hence, the 2050 price is "suspect".

I am working on a way to change that. It is not so simple because of the non-linearity. It is an entangled system.
 
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Ok predicted oil price instead of real oil price now drives the SPX model. Here are the two model outputs (that they are close together now is "accidental". They can diverge). With real oil price is the third model.

  • SPX ~2029
  • SPX ~2022
  • SPX ~2055
Close to where SPX is actually trading. Model predicting modestly higher.
 
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