I posted about it the oil situation earlier, and here are some ramifications: Interactive Brokers took a $88 million hit on client margin accounts on oil futures:
Several Interactive Brokers LLC (“IBLLC”) customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses in excess of the equity in their accounts. IBLLC has fulfilled the firm’s required variation margin settlements with the respective clearinghouses on behalf of its customers. As a result, the Company has recognized an aggregate provisionary loss of approximately $88 million.
Other financial institutions and/or funds were probably cleaned out on this transaction as well.
Anybody investing in the USO ETF (US Oil) is actually investing in a combination of the two front month futures contracts (retail is crazy to use this ETF as an oil instrument – if they really feel like ‘safely’ speculating on oil, better to put some money in XOM, COP, or if they insist on Canada, SU or CNQ). At the time of the May 2020 contract calamity, USO had zero exposure (they already rolled over to June), but today there was visibly obvious trading action on the charts that are classic liquidation trade signs:
Whenever you see “V” type charts, especially sharp ones that you see here, this is most likely due to a function of margin trading and customers getting cleared out en-masse – a cascade of market sell orders in the accounts with insufficient equity. Conversely if you’re bright enough to put some layered orders on the buy side (and have sufficient fortitude to not catch the absolute bottom since you have no idea when the forced selling will end) you can make huge profits in a very short period of time.
Needless to say the negative oil prices on the May 2020 contract (coupled with some rumours of Supreme Leader Kim) has increased the perception of market volatility and risk, and I have been nimble enough to reduce risk and get out of the way of any potential blowups of this magnitude. The net result of this is that a whole bunch of oil producers are going to go belly up and this will drastically reduce the supply going forward, probably at a higher rate than the decrease in demand exhibited to date.
Now my next question is: Are banks the next to drop? They are ultimately backstopped by central banks, but I deeply suspect they are in more trouble than it may seem. People looking for “safe dividends” in Canadian financial banks should be very, very cautious right now. It’s very difficult to predict how much of their lending will go belly up.
For those of us who hold brokerage accounts with IB, is this safe in a severe market downturn in positions excess of a million? I believe CIPF protects your investment account, up to $1 million?
https://www.interactivebrokers.ca/en/accounts/accountsProtection.php?ib_entity=ca
IB is publicly traded so at least you have some idea of what’s going on there – it would have to be a catastrophe of monumental proportions for them to go south, as in multiple concurrent nuclear missile strikes bad. They reported Q1-2020 today (https://www.secinfo.com/d1a4q2.h2.d.htm) – they’re in very good shape.
Re Canadian banks: their combined total O&G loans are ~$60bn, which is only 1-3% of each bank’s loan book (and mostly senior secured, for however little that is worth).
Surely this will hurt, but compared to the other potential issues they’re facing (commercial real estate loans on retail/hotels, construction loans, unsecured mortgages, lower rates = lower NIMs, etc.), O&G is likely the least of their concerns.
Jordan
@Jordan – my comments about the banks were more broad based and indeed my big question mark for them are construction loans – real estate is going to get hammered pretty badly here and it’s going to be interesting to see how the banks will clean up the mess on their loan books.
I think direct exposure for the banks may be limited, but indirect exposure could be huge. For instance, any business in Alberta is indirectly impacted by oil and gas. Saskatoon’s doing pretty badly too.
Thanks for the insight Sacha.
To anyone….are ZWB and ZEB the best way to play the banks?
I’ll offer some uninformed speculation but anybody considering any of the Canadian bank ETFs of any fashion should just instead spread the money among BMO, BNS, CM, TD, RY and if you feel diverse, CWB and NA, and if you feel speculative, LB, EQB, HCG. I’ve just saved you at least 50 basis points of MERs with this paragraph. You can paypal sacha@divestor.com if you wish to buy me a coffee or two in cost-saving appreciation! (and considering the coffee shops are closed, such funds would go directly to buying a bag of coffee beans at Costco and going into my espresso machine).
The covered call ETFs are just an excuse to ramp up MERs and cap your upside. And if you believe the upside is limited (with covered calls), then why bother investing in them at all?
Thanks Sacha
I’ve heard many pundits say the same thing on BNN. I should have been clearer on my ask.
I have been playing the REITS using XRE , in/out twice now (in the last 30 days) for over 19%, presently out, looking to get back in. I was looking/thinking of a simple way to play the Canadian banks….one buy, in/out ,kind of thing.
The only thing I tend to go long on , are debentures….usually to maturity. It has served me well so far…..especially in the last couple years.
@Marc: For short term pancake flipping, those ETFs are fine then. When I hear people having USO in their portfolios as long-term holds “to expose themselves to oil”, they deserve the losses coming to them.
And debentures are good to hold onto just for the reason, a well defined time where you get paid, and in most circumstances you don’t have to pay as much attention to the underlying company if getting paid back is no longer in question.