Month: August 2014

After two rounds of escalating sanctions, which have pushed if not Russia then certainly Europe to the brink of a triple-dip recession, the US has a modest proposal for Russia: to cripple Europe’s economy even more, or said otherwise, even more sanctions for Russia!

#BREAKING US warns of possible new sanctions against Russia over Ukraine

— Agence France-Presse (@AFP) August 28, 2014

In short: Mario Draghi is rejoicing as the time to cut Europe’s GDP forecasts once again is here, which also means more easing from the ECB is now assured, thus making the uber rich even richer, while continuing the evisceration of the global middle class.

In the meantime, one wonders if the US, which recently decided to begin bombing Iraq under the pretext of “humanitarian intervention” which is now long gone but the US bombing campaign persists with one simple purpose: to move the bombs to Syria, terminally cripple the Assad regime and allow the Qatar gas pipeline to finally enter Europe bypassing Gazprom and Ukraine entirely, will also get involved on the side of the east Ukrainians who continue to be caught in the middle of a civil war and are shelled by the Ukraine army on a daily basis. Somehow we doubt it.

And now, we eagerly await the release of even redder lines and even hashier tags by the GOTUS to show that he really means business.

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Yields on European sovereign debt have collapsed in recent months as investors piled into these ‘riskless’ investments following hints that the ECB will unleash QE (at some point “we promise”) and the economic situation collapses. However, Mario Draghi has made it clear that any QE would be privately-focused (because policy transmission channels were clogged) and the appointment of Blackrock to run an ABS-purchase plan confirms that those buying bonds to front-run the ECB may have done so in error. As Rabobank’s Elwin de Groot notes in six simple comments that he expects continued “procrastination” by the ECB over sovereign QE even after dismal economic data – and in doing so, exposes the entire facade behind The Fed’s QE.

Six reasons why the ECB will delay Sovereign QE as long as possible (via Bloomberg)

1) Legal constraints, or risk that ECB will be challenged in court for tinkering with “debt monetization”

 

2) ECB and national central banks would expose balance sheets to heightened credit and duration risk

 

3) QE may not deliver sufficient “bang for the buck” as bund yields are already low

 

4) Unclear whether program would have much impact on real economy

 

5) QE disturbs efficient allocation of resources

 

6) Risk of creating bubbles in asset prices

Perhaps it is time for the Fed to read those last 3!!

*  *  *

So buying sovereign bonds in the view that the ECB will be the big bid for you to sell to in the future at any price you like appears to be “wrong” and with the massive positioning apparent in the market this could be a problem. In fact – if one were to try to trade an ABS-QE, it is the ABS risk premium compression alone that should be traded… (as we noted here, real borrowing costs remain extreme)

These are “market” rates… i.e. what real risk is being priced at away from the hand of Draghi…

And so – smart money will be selling government bonds and buying any and every ABS-backed asset they can find in an effort to monetize the ECB’s risk compression. The question is – who wil be the first seller?

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First Russia and China, then UAE, Egypt, and Turkey… and now it appears Germany (following a phone call with Putin) is pulling the rug out from under US hegemony – just as Obama’s warmongery ramps up…

• *MERKEL SAYS U.S. CAN’T SOLVE ALL THE WORLD’S PROBLEMS ANYMORE

Which is odd because just yesterday, President Obama (who never lies) stated “The United States is and will remain the one indispensable nation in the world…“ adding that “no other nation can do what we do.” Perhaps he is wrong?

“Even a superpower can’t solve all of the problems alone anymore,” German Chancellor Angela Merkel says.

Merkel did not stop there…

• *PUTIN, MERKEL URGE DE-ESCALATION IN UKRAINE, KREMLIN SAYS
• *PUTIN, MERKEL DISCUSSED GAS TRANSIT VIA UKRAINE, KREMLIN SAYS
• *PUTIN INFORMED MERKEL OF NEW EAST UKRAINE AID PLAN: KREMLIN
• *MERKEL URGES HOLLANDE TO CONTINUE REFORMS IN FRANCE
• *MERKEL SAYS HOLLANDE HAS CHANCE TO REVIVE FRENCH ECONOMIC POWER

Seems like she is returning to the offensive from the defensive…

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Submitted by Martin Armstrong of Armstrong Economics blog,

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Presented with little comment aside to ask rhetorically just how screwed up markets and macro data are to allow ‘this’ to happen…

For the first time in history, based on FRED data, the 30Y constant maturity yield is below the real GDP growth level…

h/t @NoAplha_AllBeta

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While we have yet to do the actual math on the now-concluded second quarter earnings season, to find out if spending on buybacks surpassed the Q1 record, one thing is still quite clear: with the impact of Fed’s QE fading, if only for the time being, buybacks remain the marginal driver, and according to some only driver, of stock market upside in 2014. This was shown explicitly in this chart we posted three months ago:

However one person who has decided not to wait in declaring the buyback party over, is SocGen’s Albert Edwards, the same person who correctly forecast back in late 2012 the epic scramble by investment grade (and high yield) companies to lever up, incidentally, to record levels crushing all the endless blather that there is some massive corporate deleveraging going on.

This is what Edwards said in his latest note:

Much has happened over the summer, but two landmark firsts have occurred only recently, with the S&P500 breaking above 2,000 and the 10y bund yield breaking below 1%. Our Ice Age thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course. It is the equity markets where I have been consistently surprised. QE has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes

In other words, while QE has been the permissive factor enabling companies to engage in zero cost debt-funded stock repurchases, it was corporate CFOs and Treasurers who, in lieu of traditional retail and institutional buyers, have been the marginal buyers of stocks in the tail end of the most ridiculous, rigged, and as CNBC likes to call it, “unloved” rally of all time.

Here is the bad news:

It is widely accepted the Fed?s QE programme has inflated asset prices way above fundamental values (higher inequality being one unwelcome by-product). Andrew Lapthorne has identified the mechanism whereby QE, by shrinking the available stock of investable government bonds, has encouraged investors to instead gobble up other debt assets all along the risk spectrum. Companies issuing at low yields into this buying frenzy are doing what they always like doing with debt in the final throes of an economic cycle ? they issue cheap debt to buy expensive equity. Decent profit (cashflow growth) may be more than sufficient to cover capital expenditure and dividends, but a gargantuan funding gap emerges as companies also undertake their corporate finance zaitech activities (see chart below, Andrew also calculates that currently almost a third of all buybacks are to cover the expense of maturing management share options ? QE is indeed making the rich richer!).

 

Of course, none of this is new: this particular cycle always mean reverts, as does the business cycle itself: the same business cycle which the Fed, with its infinite manipulation of all asset classes, and in its infinite stupidity, thinks it can control and delay the onset of the recession, when all it is really doing is making the drawdown that much more severe when it ultimately, and inevitably does hit:

… the elephant in the equity buying ring has been the US corporates themselves (see chart below), who have been hoovering up stock at a prolific pace from the household sector (mainly) financed by debt (see chart below). This is a normal cyclical event but made easier this time around by QE.

 

 

In retrospect there can be little doubt that QE has washed through the financial markets and elevated share prices via this route. The problem is that this pro-cyclical event has a habit of stopping suddenly for the usual reasons ? i.e. recession or a closure of the credit markets, etc. Andrew in his 18 Aug note shows that is exactly what seems to have happened in the latest Q2 data where share buybacks have actually declined dramatically on both a QOQ and YOY basis. He believes the end of QE may be directly responsible for this – see Bye-bye buybacks ? the end of QE is already being felt in the equity market.

The good news, if only for those sick of all the endless Fed manipulation of every asset class, something even Steve Liesman finally acknoledges, is that is if finally all ending…

This pro-cyclical process always ends in tears and is regarded in retrospect as typical end-of-cycle madness. For when the funding for corporate bond issuance stops (for whatever reason, i.e. QE ends), share buybacks also stop and one of the biggest drivers for the equity bull market is removed.

 

 

The equity bubble has disguised the mountain of net debt piling up on US corporate balance sheets (see charts below). This is hitting home now QE has ended. The end of the buyback bonanza may well prove to be decisive for this bubble. Indeed – is that a hissing I can hear?

… at which point the Fed will have no choice but to step in again, and the central-planning game can restart again from square 1, until finally the Fed’s already tenuous credibility is lost, the abuse of the USD’s reserve status will no longer be a possibility, and the final repricing of assets to their true levels can begin.

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Submitted by James Stafford via OilPrice.com,

Who could have ever imagined that North America would surpass Saudi Arabia as the world’s largest producer of oil and natural gas liquids? A decade ago, that would have seemed laughable.

Yet that’s exactly what has happened; and it’s not just Saudi Arabia that has been left in North America’s dust — Russia has, too.

The surge in North American oil and gas production is arguably the most important development in energy over the last decade. That’s the good news. The not so good news is that North America doesn’t have nearly enough oil and gas pipelines to accommodate its 11-million-barrel-a-day output level.

The famously unresolved proposed Keystone XL pipeline would carry oil from Canada to the U.S. Gulf Coast, but its future is in legal and political limbo. The controversial Northern Gateway pipeline, proposed as an alternative to Keystone XL, would connect Canada’s oil sands to the Pacific Coast, allowing greater volumes of oil to be shipped to Asia, but it, too, is still on the drawing board.

Both are good examples of how pipelines – considered the safest way to move oil and gas – have become politicized and scrutinized, and not without reason. Despite their reliability, pipelines still lead to an unacceptable rate of safety mishaps. They corrode and rupture, which threatens workers and nearby communities. In 2013 alone, over 119,000 barrels of oil were spilled in 623 incidents.

America’s existing pipelines are getting older and more prone to corrosion, and over the next five to 10 years, there will be a significant increase in the number of new pipelines.

And that is creating a huge opportunity for better pipeline safety technology.

Monitoring and detecting corrosion in pipelines is still a crude affair (no pun intended). Pipeline companies tend to underspend on safety, concerned only with meeting the minimum regulatory requirements.

One of the major ways pipeline operators detect corrosion is with a “pig,” a machine that travels down the inside of a pipeline looking for problems.

Pigs are not new — the industry has long relied heavily on them—and the newest generation of pigs, known as “smart pigs,” is considered an improvement over the pigs of yesterday. Smart pigs give a read on the state of the pipeline, such as cracks, corrosion, and metal loss. Operators receive this information in a control room and can then dispatch crews to fix the problem. As of 2012, 93 percent of pipeline inspections were conducted using smart pigs.

But smart pigs might not be enough. Enbridge (NYSE: ENB), a major Canadian pipeline company, has spent over $4.4 billion to upgrade pipeline safety. It is spending big bucks after one of its pipelines spilled oil into the Kalamazoo River in 2010 – a corrosion breach that Enbridge’s smart pigs failed to detect ahead of time.

And that’s the problem: despite recent advances, smart pigs aren’t terribly accurate. They also require pipeline operations to shut down (you can’t pump oil through a pipeline if there is a machine in the way), and analyzing the data smart pigs gather can take some time. The Wall Street Journal ran an article last year that talked about the pitfalls of smart pigs, even as pipeline companies continue to depend heavily on them.

So alternative methods to detect trouble spots are needed. One method for detecting corrosion uses a device from outside the pipeline. A series of sensors placed on the outside of the pipeline can search for corrosion without interfering in operations.

Pipeline safety company Fox-Tek, a subsidiary of Augusta Industries (CVE: AAO), uses such a system to detect corrosion, as well as a fiber optic system to detect bends, strains and stress in pipelines.

But the real innovation in Fox-Tek’s system is its data analytics package. Companies that use smart pigs usually need to spend months doing post-inspection analysis, but Fox-Tek has developed proprietary software that does continuous and automatic analysis.

Fox-Tek’s sensors gather information and automatically send back confidential reports on everything the company needs to know – temperature, pressure, strain, rates of corrosion, etc. in the form of handy graphs, charts and diagrams. It eliminates the need for an army of people to go out and inspect pipelines and then come back to do the analysis.

The pipeline safety market is massive and growing, but one of the major hurdles for new technologies like advanced sensors and software will be reluctance by pipeline companies to proactively invest in corrosion management and maintenance. In the past, they have largely focused on the bare minimum and viewed safety as a regulatory requirement.

However, there seems to be a sea change in the pipeline industry, particularly since operators are running into an environmental backlash. The blocking of several high-profile pipelines may have finally gotten the attention of the industry. Bringing local communities onboard and acquiring permits from regulators will require pipeline operators to demonstrate improved safety throughout their networks.

But above all, pipeline companies will see dollars saved by using cost-effective monitoring systems to reduce pipeline leaks. Enbridge has been forced to spend around $1 billion to clean up its mess in the Kalamazoo River, which was the result of a corrosion breach. It could spend a fraction of that to have better information on pipeline corrosion to prevent a growing problem from getting worse. That could reduce the frequency of future pipeline spills.

This could be a game changer in terms of how oil and gas pipelines are viewed in North America. If operators use smart software to catch small problems before they can turn into big ones, the common view of pipelines as accidents waiting to happen could be erased. Instead of seeing them as an environmental risk, the public may grow to see them as just another piece of modern infrastructure that facilitates commerce.

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