F1: Then vs Now

 I got into F1 back in the early 2000's during Schumacher's hey day. Ferrari's budget was astronomical, qualifying was an hour where any number of laps was permitted. There were two tire manufacturers to choose from. Cars weren't filled with gas for the entire race, so there was more strategy around fuel weight vs number of pit stops. If memory serves, there weren't limits on engine changes, gear box changes, or off season testing. 

Ferrari dominated so much and the fans got bored so F1 decided to through in a bunch of arbitrary rule changes. Qualifying divided in to three segments so the top guys have to run at least three times. All the DRS and KERS. Now cars are fuelled for the entire race and they have to use a certain number of tire compounds all from one manufacturer. Changing too many components has punitive damages now. And even after all of this, one team and driver has dominated winning 7 championships. 

Was it all for naught? Maybe. F1 is maybe cheaper to participate in, but what's the point of having Haas in the series? They have no chance of really adding to spectacle other than getting in shouting matching on the Netflix series. 

I guess I'm not a fan of rule changes solely for the sake of trying to make the racing more interesting. The NBA didn't change a bunch of rules when the Bulls were crushing everyone. The NFL hasn't followed suit with the Patriots' domination. And the NHL didn't do anything when the Red Wings were the definition of consistency. As far as I know, rugby didn't make any changes to try and hamper the All Blacks.

F1 engineers are so good that they can optimize right up to the rule right after it's been changed. Just look at BAR winning with Jenson Button. That's maybe the real issue: there's a very finite supply of very talented engineers and not every time has access. At this point F1 is quickly closing in on becoming a stock car league with fewer options around engines and chassis putting the onus on the driver's talent. Maybe it's a good thing, maybe not.

 

Talking Your Book #45

 Well of course more shots will offer protecting against omicron. Especially if it is pharma companies telling us this. Not a biased opinion at all. Everyone talks their book at all times. Remember that. Why are we listening to them at this point?

Everything Will Change

 Our friends will pass on, our families too. Our favourite spots will disappear. Leave your mark while you can. Or don't. And shut the fuck up and stop complaining.

Get Outside

 The best antidote for Covid is to get outside and not look a screen for an hour or two. It's a great way to forget the current state of the world.

Comfort Zone

 The longer we stay in our comfort zone, the smaller it gets.

Natural Gas Market

After hitting about $1.50 a month or so ago, the March/April spread is now around $0.17, signalling that winter in the Lower 48 is over and there's next to no chance of running out of gas before the summer injection season. This spread typically will not trade below -$0.10 and has the potential to explode back over $1.00 if any weather shows up or if a pipeline fails or if someone gets caught excessively short and cannot defend their position.

Interestingly, the end of March 2022 storage level was trading around 1,400 bcf when March/April was at $1.25 and is now closer to 1,500 bcf with March/April at $0.17. Easy to say in hindsight, but a 1,400 level to exit winter is probably safe to enter the injection season with and March/April was way overvalued. A 1,400 level is very tough to reconcile with March/April trading at very lofty levels. The only thing I can think of from a distribution of outcomes perspective is the levers gas would have to pull on in order to turn off demand to balance the market during the winter:

• Turn off Mexican exports at some price above $7
• Turn on fuel oil and diesel power generation along the eastern seaboard between $10 and $12
• Turn off LNG exports (60-90 days in advance, mind you) at prices over $30

As long as these leavers were on the table as substantial balancing mechanisms one could argue that March needed to price in some probability of having to do some heavy lifting. April would not rise as much because the weather is typically much more subdued and the market can balance at a much lower price.

Natural gas classically overreacts in both directions. And now, in early December it is throwing in the towel. This with European and Asian prices holding over $30 with well over 100 days remaining in the withdrawal season. I am a natural gas bear and so mentioning March/April as a potential buy for its potential convex payoff means I have overcome some degree of bearish AND gotten bullish.

Another bearish indicator: the April/October spread has moved into contango, now trading around -$0.11, April below October, signalling a loosening balance in the summer. And after trading around -$0.34 for the past couple of months, the October/January spread has widened out to -$0.40, slowly moving from an under fill situation to a more balanced end of summer inventory level. The width of this spread is indicative of running out of storage capacity at the end of summer, the wider it is, the higher the chance of of running into issues at the end of October.

Fun Markets

 Last week was very volatile and it was chalked up to the following: 

• Omicron
• The Fed removing the word 'transitory' from 'inflation'
• A potential increase in the speed of the tapering process
• Higher probability of rate hikes
• Lack of liquidity
• And correlations going to 1 as everyone who is (leveraged) long panic sells at the same time and buys USD and Treasuries

The part I do not get is how much of this is really new information? Maybe only the increase in the speed with which the Fed is going to stop buying bonds? We were already expecting rate hikes galore in 2022. 

Cleary market participants can't keep a position on to save their lives and roll out of it the moment it goes against them. I get the argument that index levels were elevated because of the liquidity being provided by the Fed and the chance of this disappearing would lead to a repricing.  But wasn't that priced in as well?

Hedge funds got throttled trying to make some returns before the end of year.