Friday, March 13, 2015

First time ever post on Petrobras [PBR]

In my recent post on how my EW model suggests that the dollar is at or very near a major peak (and perhaps a peak that will surprise most people in how far it might fall from here) I mentioned how Jim Cramer got his bearish dollar call exactly wrong.  Well, since he is on TV and I am a complete unknown (save current readers of course, which currently number only a scant 15k per month), I thought I would look at what he's saying now about the dollar.

Well, according to this article which was only a few hours old at the time of this post, Cramer's now suddenly worried that the strong dollar will collapse Petrobras (which is essentially a monster Brazilian state owned national oil company whose ADRs were floated on the NYSE).  Well, whatever that gentleman says, consider doing the opposite!  So let's have a peek at the chart of Petrobras [PBR].

MY OH MY!  WHAT HAVE WE HERE???  Oh thank you Cramer for being such a wonderful contrarian indicator.  I would never have checked Petrobras had you not had negative comments about it.  I mean, WOW.  This is one of the nicest EW charts I have seen in a long time.  5 perfect waves up form a mania peak but NOT five waves down folks.  Instead we clearly see THREE down as in a-b-c.  And that means it is a retracement of the broader trend which is up.  This is likely to be a very deep vee 2nd wave which will reverse very rapidly as the dollar pulls back.  This chart says that oil (which is globally priced in dollars) isn't dead after all.  In fact, this suggests that we are being presented a buying opportunity here as good as any seen during the lows of the Great Depression.

This here, people, this is what you call lucky timing.  Of course, fortune favors the prepared mind.  Most people think like Cramer: PBR will BK.  Why?  Because it is embroiled in a major scandal having to do with corruption, bribery and probably much much worse if truth be told.  Of course, the scandal is somehow made worse in the eyes of the herd since members of the ruling class of Brazil are involved.  Well, this sounds a good deal like what I said would happen in the final days of the debt Ponzi: the people have already collapsed and now the oligarchs, who stand on the shoulders of the working class, will come tumbling down and finally be seen as the organized criminal cartel that they actually are.  The marginal players are always hit first; the US will get the same treatment soon.

But scandal, dear readers, is not BK material otherwise all major corporations would BK and all major politicians would be in jail.  We like to think that scandal is rare and thus we make a big deal of it when it gets uncovered but scandal is the very nature of man.  Corruption is the nature of man.  And doubly so when Mammon runs the show!  This is business as usual the world over and PBR will continue on long after this scandal is put behind it.  Scandal does not affect the value of PBR as an economic value adder, it simply uncovers who has been pocketing all the dough that it makes.  How do you think rich oligarchs get rich, by earning it?  HA HA HA HA!  Why earn it when everyone seems so gullible for so many decades running?

So I think the idea that PBR will BK is way out of line.  I just checked and it has $22bn cash to $106bn debt.  5:1 isn't good but I have seen far, far worse support many companies for a long time.  Importantly, it still made 6.3 bn USD over the past 12 months AND it is partially state owned.  Importantly, it is responsible for a huge number of good paying jobs and Brazil simply cannot let the Wall St pump and dump game play them out of their assets at the bottom.  Remember, if PBR goes BK then someone else gets physical control of the assets.  The assets aren't going away!  They will just get transferred to new owners.  But the existing owner is the country of Brazil and so this baby is going to receive state backing long before it goes BK.  And so it likely won't BK (odds, not certainties...). 

This chart is telling me something very big is about to happen.  It will take something very big to reverse this collapse yet the EW model strongly suggests that a major reversal is near.  It would not surprise me to see China and Russia finally come out against the dollar with a gold backed Yuan/Ruble international monetary unit or some such.  It could, perhaps at first, be targeted for use in international payments for oil instead of the petrodollar.  That way, Brazil and Russia can both sell oil to China on a fair and even keel instead of getting tossed about by this wildly gyrating piece of crap known as the dollar.  Something must be done in order to stabilize this and the easiest thing would be to:
a) attack the dollar somehow (massive treasury sales?) followed by
b) announcement of a gold backed alternative to the petrodollar.  This would have immediate negative ramifications on the dollar. 

Of course these potential reasons behind a reversal in PBR are just wild, unmitigated speculation but it would seem to take something like that to reverse this massive PBR meltdown.  Yet the Elliott waves are clear: this is a retracement and not a motive wave down.  This means that it won't likely go lower than than its 2002 price of around $2.40.

Zooming in to just the last portion of the collapse from late September until now (AKA 5 of C) we see that 5 very nice waves are at or very, very near a bottom.  I suspect it will take the red path but would not be surprised to see the blue path taken either.  The wave count is a bit ambiguous in that final wave down over the past month so it can go either way.  But today's arrival at the $5 price point is like buying a non-expiring call on oil.  Of course, never put all your eggs in one basket but this is clearly a basket that deserves a portion of a "buy and hold" portfolio.  The likelihood that this will double within six weeks of its actual bottom is approximately 100%.

Zooming in even more, let's see if I can call the exact bottom on this just for sport.  Not trying to be arrogant here, just having some fun with the EW principle.  The model suggests that it will bottom at either $4.80 (mid channel of the falling wedge) or $4.60 (throw under of lower rail) by Monday's close.  Maybe that is only the bottom of wave 3 of 5 (it looks like a falling wedge/w3) and we get a double bottom as shown, perhaps of the inclining double bottom type (failed 5th).

Now let's look at it on the daily log scale.  Sometimes different features pop out at you when you view it under a different light.  As you can see, it looks like 5 fairly clear waves down.  Perhaps that big falling wedge at the bottom is a 3rd wave but that is not my primary count because of how clear red 1,2,3 and 4 already are.  That means it could be WC.  As in WC2.  As in a monster deep vee second wave caused by a deflationary crash in oil.  My long standing thesis is supernova: first massive deflation and then massive inflation or even US hyperinflation.   Folks, the lion's share of deflation has already happened for oil as you can see from PBR's price chart.  It's possible for oil to dip momentarily to $30 or lower but it won't stay there long.  

Remember: hyperinflation is ultimately not caused by money printing even though most people believe this to be true. When the conquistadors brought back shiploads of stolen Inca gold and silver to Spain, it resulted in a rapid devaluation of the purchasing power of the metals because of the sudden inflation of the money supply (inflation doesn't care by which means the currency supply is increased relative to production!).  But it did not cause hyperinflation.   

Gold and silver cannot hyperinflate ever because they are not faith based.  One does not have to believe in the legitimacy of the issuer in order to trust the soundness of gold and silver.  Gold is only created in the universe by supernovae of stars will stellar masses of 8 or more.

Part of this trust is in fact how quickly new currency is added to society (whether via money printing or via looted Inca treasure).  But that is just one of many variables which the herd uses in order to determine the purchasing power of a currency.  It is ultimately the loss of faith (for whatever reason) in the issuer of the currency which is behind hyperinflation.  That and that alone is what causes the von Mises crackup boom.

In any case as you can see at left, the lower rail has broken down.  Not just that, it was taken out with a gap.  The herd knows that rail is there.  When that lower rail is retaken to the upside, that is the first confirmation that the oil crash (and probably all commodities at that) is over (or at least a very significant bottom is in place).  The dollar will probably begin to head down at the same time.


Augustine said...

As any state company, Petrobras is a company dear to my gal bladder, deserving all my bile.

First off, Petrobras is not only a Brazilian state company, but also a state monopoly on exploration and refinement of oil. In other words, it's a state sponsored company which has a captive market guaranteed by law. In other words, not only can it not go bankrupt, for it's not a company but an arm of the state, no one can legally acquire its assets.

Though after years of high oil prices and relative success hitting new reserves Petrobras has posted huge profits, its history is much more checkered than that and with more red squares than black ones.

This means that Petrobras is actually a cancer in Brazil, providing expensive and low quality energy to a poor populace, draining the public coffers in downturns and pocketing the profits in upturns. Petrobras is also a storage of members of the ruling class between hit jobs, I mean, elections.

The recent corruption scandal got the limelight because of the general mood: vis-à-vis the huge protests a couple of years ago. It's neither the first nor the largest corruption scandal in its history. Energy ministers rotated in its presidency, even a former president without a high school diploma chaired it, most nincompoops who couldn't add, just multiply their bank accounts during their tenure.

So, yeah, ignore Cramer and the fundamentals, only the charts matter.

Augustine said...

Speaking of the mood turning sour, millions of Brazilians went to the streets today to demand the seating president, involved in the corruption scandal at PBR when she was a member of its board as the Energy Minister, to be impeached: As they say, when there's blood on the streets, it's time to buy.

The Captain said...

Now that the government knows the people are ready to riot, change will have a chance to happen. Once out of control it seems that the real threat of physical violence is all they will listen to...

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