TMM have recently been bemused by the strength of equities and industrial metals in the face of some pretty dire developments in the Middle East and amused by the antics of Charlie Sheen. On the face of it, they do look rather similar in some respects: both hopped up and energized on forces known (QE and being able to date two women in their early 20s) and unknown (how China maintains an entirely investment driven economy and for Mr Sheen's secret ingredient check
TMZ). However, every silver lining has a cloud and TMM are growing increasingly concerned about what $100+ oil means for US consumers and what the National People's Congress means for Chinese growth.
Let's start with something everyone agrees on: $200 oil would put us into a double dip and then some. How odd it is that out of the money equity vols seem to be a long way from out of the money crude vols, which have gone all bid out all the way along the curve. It is nice to see that investors have picked up on the fact that middle class discontent in the Middle East is about as well contained as the collapse of the shadow banking system circa 2007. TMM are not so sure about being long oil here as a fair bit of risk is priced in even out to December now, but one-step-removed trades like being long energy assets in good jurisdictions or ones with high costs (Hellllooooooo Alberta….) do seem to have less downside despite a good run –
PetroCanada Suncor PE (light blue) and stock price (dark blue) below. Suffice to say it doesn't look that crazy to TMM, given that Saudi Arabia blowing up will make this the mother of all cash cows and it has only about 25% downside on valuation assuming all is well. It's certainly cheaper than crude vol!
That of course assumes that it does not kill US consumer spending which has been a fairly important part of the recovery and will be more so once the government gets serious about deficit reduction. The problem is that this is coming as the
100% depreciation allowance for capex for 2011 expires and 6 month ahead capex intentions from Philly Fed seem to be rolling over (see below). Watch this space – channel stuffing can be driven by tax policy too.