Month: September 2018

Submitted by Viktor Shvets of Macquarie

All measures of liquidity continue to tighten…

All of our measures of liquidity have continued to weaken over the last two months. This applies to public sector liquidity, which has now declined to ~3% (vs 16%+ growth in ‘16 and ‘17)…

… US$ liquidity is negative (vs growth of ~5%- 6% in ‘17) and money supply (down to 4-5% vs double-digit growth in late ‘17).

G5+China M2 has fallen over the last four months by over US$2 trillion. At the same time, CBs are gradually pushing up the cost of capital.

While investors have already witnessed several tremors (VIX volatility in Feb’18, massive explosion of basis points and TED and US Libor in Mar-Apr’18, DXY acceleration and attack on the most vulnerable of EMs in Jul-Sep’18), the degree of dislocation has thus far been contained. For example, EM FX volatility rates have recently again eased and the same applies to EM high-yield corporate debt…

… while both OIS Libor and TED spreads remain relatively placid, and the US high-yield market continues to enjoy some of the lowest ever spreads (~3.2%). It applies even for CCC & below debt (~6.6%).

… but complacency keeps returning as inflation remains subdued

Although one could highlight some specific measures (e.g. IMF rescue of Argentina or tightening in Turkey), we believe that returns to complacency are primarily due to a deeply held view that CBs would never allow any meaningful break-out of volatilities, and would step-in with either liquidity supports and/or end of tightening while as long as the US domestic economy is strong, the risk appetite is expected to prevail. If we dig deeper, investors seem to agree with us that overleveraging, lack of clearance of past excesses & disruption are generating such strong headwinds, that break-out of excessive wage inflation is unlikely, even as markets tighten. This in turn, limits the degree of damage to margins or rise in the cost of capital, except for the most marginal of cases.

We worry about the next six months; but 2019-20 might not be bad

Our concern remains one of accumulation of policy failures, as CBs and investors understate the degree of linkages between asset classes. For example as 30Y mortgages touch 4.7%, there are already signs of tightening. Similarly rising short-term rates are bound to impact car loans & credit cards, while more vulnerable EMs could infect stronger EMs, causing a more robust contraction at the time when OECD leading indicators are already easing.

The role of the Fed and China is particularly important. It seems that the Fed is only focusing on domestic strength, while ignoring global tightening. As long as it continues to view the world through one-dimensional lenses, the non-US world runs a risk of significant contraction, which in turn would return to haunt US. Similarly, while recent actions have stabilized China’s credit impulse, it does not yet represent a substantive policy shift. While most investors worry about ’19-20, we remain far more concerned what would happen over the next six months. Either the Fed stops and China stimulates, or accidents happen. EMs still look very vulnerable; but ‘19-20 might not be bad years, as either normality returns or Fed pulls back. Systemic failure is not an option.

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With Tesla stock plunging 13%, suffering its biggest one day drop in years as the market was forced to evaluate a world in which Elon Musk is no longer affiliated with the company should the SEC get its wish (a proposition which according to Barclays could wipe out as much as $130 from the TSLA stock price), bond traders are likewise trimming their exposure, which in turn has sent Tesla’s default odds to a new all time high.

According to CMA, Tesla credit default swaps – i.e., the upfront cost of protection against default – rose over 1% to 22.8 points, the highest on record. This means that for every $10 million in protection, investors will have to pay $2.28 million upfront. This also means that the implied probability of default over the next 5 years is an all time high of 48%.

Alongside the stock selloff, Tesla’s junk bonds fell to 84.75 cents on the dollar, down half a cent.

Tesla currently has $11.5 billion in outstanding debt, of which European insurance giant Allianz is the biggest holder. At the end of February, $920 million in convertible debt matures with a convert price of $360. Tesla is currently trading 30% below that price, so it will come due as cash instead of equity for holders of those notes unless the stock somehow surges by $90 in the next 4 months.

Making matters worse for Tesla is that the company will now, with the SEC lawsuit in play, almost certainly require another cash infusion before it reaches profitability, and the new capital would be far harder to come and be more expensive after SEC lawsuit, especially if Musk is forced to step down.

“To be clear, near-term if Tesla is able to ramp the Model 3 over the coming quarters, we believe cash flow should improve,” Joseph Spak, an analyst at RBC Capital Markets said Friday. “Having Elon Musk as CEO has undoubtedly made that easier in the past. Securing attractive funding in the future could be more difficult.”

One potential loophole proposed by Covenant Review is for Musk to pledge Tesla’s intellectual property as collateral for new loans; however this plan involves a foreign entity stepping up much like Musk claimed Saudi Arabia’s Public Investment Fund was prepared to do. It is unlikely that the Trump administration would approve what would effectively be a virtually free technology transfer to a foreign power just so Musk can continue losing money.

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Iran has issued a number of threats on Friday following official charges made by leaders in Tehran that Saudi Arabia and the UAE funded a terrorist attack on a military parade in a southwest district last Saturday which killed 25 people, including members of the elite Iran’s Revolutionary Guards (IRGC).

Iranian military officials declared “red lines” against the two Gulf countries, threatening war, while in a separate statement a senior cleric said US regional bases will not be safe if “America does anything wrong”. 

“If America does anything wrong, their bases around Iran would not remain secure,” Ayatollah Mohammadali Movahedi Kermani was quoted as saying by Mizan news agency while leading Friday prayers in Tehran. 

And simultaneously the Fars news agency quoted Brigadier General Hossein Salami, deputy head of the IRGC, as saying in reference to the Saudis and Emirates: “If you cross our red lines, we will surely cross yours. You know the storm the Iranian nation can create.”

IRGC Gen. Salami was also addressing the crowd during Friday prayers in Tehran: “Stop creating plots and tensions. You are not invincible. You are sitting in a glass house and cannot tolerate the revenge of the Iranian nation…We have shown self-restraint,” he said in a fiery speech. 

Salami didn’t stop at Saudi Arabia and the UAE, but told the United States to “stop supporting the terrorists or they will pay the price”. The elite IRGC has collectively vowed to exact “deadly and unforgettable” vengeance after some of its members were killed in the Ahvaz attack. During the large funeral ceremony for victims of the attack on Monday, Salami had vowed to strike back against the “triangle” of Saudi Arabia, Israel and the United States.

Iran had previously also accused the US of providing support to the gunmen that carried out last weekend’s attack despite Washington’s firm denials that it has any links to the incident. This follows years of Tehran blaming Washington and its Gulf allies for the rise of ISIS and other radical Sunni terror groups. 

There’s been some level of confusion and contradictory claims of responsibility after the incident, however, with both a regional Ahvaz separatist group and ISIS claiming responsibility. Iran now says it has members of those involved in the plot in custody. 

The bellicose words on Friday further come after Israeli PM Netanyahu spoke before the UN General Assembly the day before, claiming a new atomic weapons development facility in Tehran; something which US intelligence officials have already publicly doubted, according to statements made to Reuters. 

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Authored by Ritesh Jain via WorldOutOfWhack.com,

Macrostrategy Partnership writes about perhaps the most important chart of the decade…

Policy divergence is now set to accelerate the US$ rally.

The Fed is in a battle with an overheating US economy, where a 4% of GDP fiscal stimulus meets an economy with more job vacancies than unemployed.

Lael Brainard’s recent speech highlights that the Fed is now looking to hike rates above long-term neutral levels.

Meanwhile, in the months ahead, China will have to accelerate PBoC printing to offset a looming bad loan crisis, while Draghi will have to reverse his recent hawkish position in the face of deflationary pressure at home. 

The last time we saw this trifecta of Fed tightening and PBoC/ECB easing was 2H 2014, and the dollar rallied by 25%.

Don’t even ask about Indian Markets, in absence of huge Dollar funding,we are just… Collateral Damage!

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Another day, another major security breach, and even more pain for Facebook which in recent months has failed to keep up with the FANG euphoria.

Facebook said that on September 25 it discovered a security breach which affected almost 50 million accounts. The company said it’s investigating the breach, which allowed hackers to take over a person’s account.

In the statement, Facebook said that “attackers exploited a vulnerability in Facebook’s code that impacted “View As”, a feature that lets people see what their own profile looks like to someone else. This allowed them to steal Facebook access tokens which they could then use to take over people’s accounts. Access tokens are the equivalent of digital keys that keep people logged in to Facebook so they don’t need to re-enter their password every time they use the app.”

The social network added that it has “yet to determine whether these accounts were misused or any information accessed.” It also doesn’t know “who’s behind these attacks or where they’re based.”

As part of its response, the social-media network said that it has fixed the vulnerability, reset the access tokens of the almost 50 million accounts we know were affected to protect their security, turned off the “View As” feature, and told law enforcement authorities about the breach.

Shares declined over 2% percent on the news.

Full  Facebook statement below:

Security Update

By Guy Rosen, VP of Product Management

On the afternoon of Tuesday, September 25, our engineering team discovered a security issue affecting almost 50 million accounts. We’re taking this incredibly seriously and wanted to let everyone know what’s happened and the immediate action we’ve taken to protect people’s security.

Our investigation is still in its early stages. But it’s clear that attackers exploited a vulnerability in Facebook’s code that impacted “View As”, a feature that lets people see what their own profile looks like to someone else. This allowed them to steal Facebook access tokens which they could then use to take over people’s accounts. Access tokens are the equivalent of digital keys that keep people logged in to Facebook so they don’t need to re-enter their password every time they use the app.

Here is the action we have already taken. First, we’ve fixed the vulnerability and informed law enforcement.

Second, we have reset the access tokens of the almost 50 million accounts we know were affected to protect their security. We’re also taking the precautionary step of resetting access tokens for another 40 million accounts that have been subject to a “View As” look-up in the last year. As a result, around 90 million people will now have to log back in to Facebook, or any of their apps that use Facebook Login. After they have logged back in, people will get a notification at the top of their News Feed explaining what happened.

Third, we’re temporarily turning off the “View As” feature while we conduct a thorough security review.

This attack exploited the complex interaction of multiple issues in our code. It stemmed from a change we made to our video uploading feature in July 2017, which impacted “View As.” The attackers not only needed to find this vulnerability and use it to get an access token, they then had to pivot from that account to others to steal more tokens.

Since we’ve only just started our investigation, we have yet to determine whether these accounts were misused or any information accessed. We also don’t know who’s behind these attacks or where they’re based. We’re working hard to better understand these details — and we will update this post when we have more information, or if the facts change. In addition, if we find more affected accounts, we will immediately reset their access tokens.

 

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Authored by Jeffrey Snider via Alhambra Investment Partners,

The Bureau of Economic Analysis (BEA) revised Q2 GDP to a 4.07464% continuously compounded annual rate from 4.13987%. More importantly, the BEA provided revised benchmark estimates for corporate profits. The good news is that the benchmark was higher. The bad news is that companies still aren’t making any money. All the revisions applied to long ago years (2008 and 2009 wasn’t as bad as they thought last year).

Corporate profits are Exhibit A for why the economy can’t grow. Can’t, not won’t. Since the 2011 crisis, eurodollar event #2, the one that proved fatal to any chance at monetary therefore economic recovery, corporate profits are up all of 1.3%. Total. Not per year.

The benchmark revisions also reshaped the last eurodollar event, too. They now place the start of the earnings recession in Q4 2014 rather than Q1 2015; more consistent with the “dollar’s” behavior and the economic reaction to it.

Though profitability has rebounded since, it really hasn’t. Profits by this measure are still slightly less than the re-dated prior peak.

Circumstances are only marginally better in other profit series, which is to say they agree on the overall situation if differ as to the degree of sheer economic degradation. Profits from Current Production, for example, have risen by nearly 11% since the start of 2012 as compared to the other series’ 1.3% gain. It’s a difference of 1.6% per year versus 0.2%. I doubt corporate boardrooms see that as meaningful.

The symptoms of this dysfunction are obvious. Companies that can’t grow on the bottom line are going to overmanage their cost structures. Throw in lingering skittishness about liquidity and they just aren’t going to be enthusiastic about taking on further cash flow liabilities; those like paying a lot for additional labor that doesn’t appear to be necessary.

Companies can’t make any money because the economy isn’t growing, and the economy can’t grow because companies can’t make any money. It only seems like a chicken and egg problem from the perspective of QE and the current orthodoxy of central bankers.

The other symptom of profit stagnation is stock market valuations. Investors are rewarding companies for doing the wrong thing. Share prices surged especially after QE4 (they initially declined after QE3, which would’ve been the correct reaction given how things have turned out had it continued) anticipating that the Federal Reserve along with the ECB and BoJ were collectively going to figure all this out.

In the aggregate, the market value of stock holdings has surged by more than 80% since Q3 2012. Profits are up not even 5%.

The current data suggests that there is no more upside than this. The lethargy is very well established by now, to say nothing of dealing with another prospective downturn looming now over the horizon as the dollar awakens for another turn.

Faced with these prospects, what would you do as a corporate officer? Markets are thought to be rational and this is one of the few cases where stocks appear to be just that – on the corporate side. Investors are clearly rewarding economic suicide, therefore corporate boards are aiding in that suicide because they have no realistic alternative.

Why invest in productive business when there is no economic upside to it? At least you will get paid at the NYSE off the widespread misunderstanding of QE.

After botching 2008 so badly, central banks found themselves constrained by their own failures. They call it the zero lower bound, the fact that nominal rates can’t be negative, but it was really the “we screwed up so badly we have to resort to different tactics” boundary.

QE was presented as a way to circumvent the nominal limitation by playing on misconceptions about money. By allowing people to think it was money printing, this would raise expectations for future inflation. Economists theorized this was a good thing; consumers would move up and even increase current spending expecting that prices would rise in the near future because of the money printing.

Businesses were supposed to react the same way; increase their activities including hiring and capex anticipating greater costs for them. What if you are a business who has been liquidity constrained, or even just nervous because of your 2008 experience?

Inflation expectations are at best counterproductive. You will instead wait for the opportunity to show itself before you actually do something this time. QE can’t work until it actually works. The Fed says it’s going to fix the economy and that will raise future costs. Fine. But I’m not going to invest and take on a whole bunch of current risk, incurring those futures costs today, until I see it first.

In the meantime, I’ll just buyback shares or buy some of my competitors while I wait for the Fed’s latest scheme to finally payoff. If it ever does.

So far, it hasn’t and many inside corporations know that it won’t. Stock investors meanwhile just keep expecting that at some point it will just kick in. And round and round we go nowhere.

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Earlier this week, The Washington Post published a report about people attempting to sell drugs on Instagram illicitly. The photo-sharing platform, which is owned and operated by Facebook, acknowledged the problem and pledged to do more, but its engineers are struggling to control its algorithms, which deliver personalized drug-related media content aimed directly at users who show interest in drugs.

Instagram has altered its algorithms and search systems to block users who use the social media platform’s hashtags to market opioids and other substances.

Recent searches such as #oxy, #percocet, #painkillers, #painpills, #oxycontin, #adderall and #painrelief — revealed thousands of posts by people across America fighting addiction, from rich millennials bragging about their hard-partying lifestyles and advertisements from drug dealers.

Eric Feinberg, a researcher and the chief executive of GiPEC, a New York City-based cyber­intelligence start-up that tracks illegal activity on technology platforms, began hunting for drug posts in June by searching for drug hashtags and followed some accounts that were selling drugs.

To his amazement, he discovered hundreds of Instagram posts appearing alongside content from 60 major advertisers. Feinberg then followed the drug dealers’ accounts, Instagram’s algorithms instantly started to market drugs directly into his feed, suggesting other drug dealers to follow and introducing him to more drug hashtags. At one point, he told The Washington Post that sellers were about 40% of his feed.

However, Monika Bickert, Vice President of Global Policy Management, immediately responded to Feinberg’s claims on the Facebook newsroom. She characterized Feinberg’s findings as “misleading” due to this methodology.

“An important thing to note is that The Washington Post’s story is based on findings from a research company called GIPEC – findings that we think are misleading. GIPEC created an artificial Instagram feed by following only objectionable content and some brand accounts. And while the fact that they were able to create it in the first place shows we still have work to do, this kind of manufactured feed is not a real representation of what most people see on Instagram,” Bickert said.

Feinberg said he also saw advertisement pieces from a range of mainstream companies—including Target, Chase and Proctor & Gamble—alongside posts selling illicit drugs.

In recent hearings on Capitol Hill, representatives from Facebook and Twitter explained to lawmakers that their engineers were actively suppressing the marketing of drugs on the platform.

“We’ve made progress in the fight against illicit drug sales on our platforms, but we have more to do,” Bickert said. “We’re committed to making sure we do everything we can to prevent this kind of abuse.”

Facebook’s vice president for global marketing solutions, Carolyn Everson, told The Washington Post that Facebook and Instagram were in the development stages of artificial-intelligence tools that could flag drug content. She said it was similar to Facebook’s efforts, in 2015, when it built software to detect the Islamic State accounts. Now they are building visual classifiers that can recognize photographs of particular pills and detect common patterns, such as the inclusion of a phone number to move the transaction onto an encrypted messaging platform.

Ultimately, in September, Instagram – which is owned by the world’s largest social network – came up with a “solution” by launching a pop-up notification that appears when someone searches hashtags for opioids, prescription medications or illegal drugs. The pop-up instructs people to seek help for drug abuse.

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