Author: admin

Authored by Irina Slav via OilPrice.com,

Texas’ economy is perhaps the most vulnerable to oil price swings given its leading role in the country’s oil industry. Recently, as prices have remained low, talk has begun about the outlook for the state’s economy.

According to a recent Reuters report, for example, smaller independent oil and gas producers in the Lone Star State are struggling to get loans from banks as the latter become increasingly wary of the ability of the borrowers to return the money when the time comes.

Jobs in the Texas oil and gas industry are falling, too. The Houston Business Journal reported this month that September saw a 1,100 decline in the number of jobs in the mining and logging sector—the category that includes oil and gas jobs. Over the 12 months from September 2018, the state’s oil and gas industry added just 1,700 new jobs, which was the lowest number of new job additions to any Texas industry over the same period, data from the Texas Workforce Commission showed.

Yet not everyone is worried. The University of Houston Energy Fellows, for instance, wrote in an article for Forbes that “the alarm bells are premature.” While the experts that make up the group acknowledge there are plenty of reasons to be worried about the economy of Houston—the article focuses on the city—oil prices are not among them.

The trade war with China and the anticipation of a global economic slowdown caused by it is a top concern for any economy and Houston is no exception. Political economic problems in Europe are also a cause for worry. Yet, according to the University of Houston Energy Fellows, bankruptcies in the Houston oil and gas industry are only slightly higher this year than last, and the credit crunch energy independents are facing now is “far from comparable to 2015-16.”

True as this may be, there is no guarantee things will plateau at this level of problems and not deteriorate further. Reuters reports that banks have marked down the perceived value of U.S. oil and gas not just for next year but for the next five years. This value makes the foundation of reserve-based loans, so the lower it is, the less money the banks would be willing to give businesses.

And then there is the question of exposure.

“Some banks believe they have too much energy exposure and want to reduce some of this risk,” a senior executive from private equity firm Warwick Energy, Ian Rainbolt, told Reuters.

“I expect the biggest issues to be with over-leveraged natural gas producers, especially those without firm transportation in geographically-disadvantaged areas,” said another financial services executive, the managing director of investment bank Carl Marks Advisors. To be fair, this executive said the biggest trouble is for companies in the Appalachia, the Rocky Mountains, and Oklahoma.

Meanwhile Texas has begun exporting pure Permian crude—the light, sweet kind of crude pumped from the most prolific shale play in the U.S. Buyers, especially in Asia, want the so-called ‘neat’ barrels with consistent quality of the Midland grade—the purer, the better. That’s a new market that can grow if producers maintain consistent quality. Any new market would strengthen the resilience of the industry despite problems with banks and benchmark prices.

This morning on Fox and Friends, Dr. Michael Baden, a famous forensic expert and former New York City medical examiner said that at the end of the investigation he did on behalf of Jeffrey Epstein’s brother, its findings are more consistent with homicidal strangulation than suicidal hanging.

Dr. Michael Baden, who was hired by Epstein’s brother and observed the autopsy, told Fox News that the 66-year-old Epstein had two fractures on the left and right sides of his larynx, specifically the thyroid cartilage or Adam’s apple, as well as one fracture on the left hyoid bone above the Adam’s apple, Baden told Fox News.

“Those three fractures are extremely unusual in suicidal hangings and could occur much more commonly in homicidal strangulation,” said Baden.

“The prominent hemorrhage in the soft tissues of the neck next to the fractures is evidence of a fresh neck compression that could have caused the death.”

“I’ve not seen in 50 years where that occurred in a suicidal hanging case,” the 85-year-old medical legend told Fox News.

This disagrees with New York City Medical Examiner Barbara Sampson’s rulling that Epstein’s cause of death was suicide by hanging.

“It appears that this could have been a mistake,” Baden said.

“There’s evidence here of homicide that should be investigated, to see if it is or isn’t homicide.”

Just another “mistake.”

As we reported earlier, Q3 GDP printed far stronger than expected, with US households going on an all-out spending spree and at 1.93%, or contributing 100% of the bottom line 1.93% GDP print, personal consumption soared an annualized 2.9%, far stronger than expected.

So, as we always do, we decided to take a look at what Americans supposedly spent the most money on in Q3, to find the source of this unexpected spending splurge. What we first found is that, unlike most quarters when there was a decline in spending in at least one category, in Q3 spending actually increased in every single category across goods and services.

Now, traditionally we would expect healthcare – a legacy of America’s aging demographic and the Obamacare tax – to provide the bulk of the upside, but in Q3 we found only a relatively modest contribution, with a spending increase of only $9.5 billion compared to Q2. Another surprise was that at a time when restaurant sales are starting to sputter, spending on food and drink purchased outside the home somehow increased by $16.5 billion in the quarter.

But what was the main driver of spending in the third quarter? Well, for some inexplicable reason, in Q3 the American consumer was scrambling to buy… recreational vehicles.

Here is the breakdown of all the categories that constituted Personal Consumption in the second quarter

Why is this especially bizarre? Because exactly three months ago when doing the exact same analysis we found that in Q2, Americans spent the most on – are you ready for this – recreational vehicles!

So for two consecutive quarters, US GDP only beat declining expectations because American consumers inexplicably surged to buy RVs? Is everyone cooking meth now?

But wait, there’s more.

As regular readers will recall, the past two quarters are hardly an outlier for this particular segment – RV goods and vehicles – to emerge as a surprise top spending category: both two and three years ago, in Q1 of 2016 and then again in Q1 of 2017, Americans inexplicably again splurged on RVs (both of those times, there was a political prerogative to show GDP growth as strong as possible… just as there is now).

It is also worth noting, that if it wasn’t for the inexplicable splurge on “Recreational goods and vehicles”, GDP would have missed expectations of a 1.6% increase, as spending in the category rose by $23.2 billion, more than a quarter of the entire $93.6 BN increase in consumer spending in Q3. To be sure, the farcical surge in RV purchases certainly would explain why the housing recovery has turned from boom to bust.

Yet what is most perplexing in light of the “data”, is that recently we reported that the RV industry has taken a massive blow from President Trump’s tariffs on steel and aluminum and other retaliatory duties on thousands of Chinese-made RV parts, from electronics to LED lights to vinyl.

Indeed, at the micro, bottom-up level, domestic shipments of RVs to dealers plummeted 22% in the first five months of this year, compared to the same period last year, after dropping 4% in 2018, according to the Recreational Vehicle Industry Association. As we added “the RV industry’s crisis shows how President Trump’s trade war has backfired, hurting the industry he promised to protect.”

Tariff-related price hikes have forced RV manufacturers to pass on costs to dealerships, which in turn the American consumer bears the brunt of the tariff, has slowed sales at dealers who are cutting orders and laying off workers.

But it’s not just us who pointed out the plunge in RV sales: Michael Hicks, a Ball State University economist who tracks the industry, warned that the collapse in RV shipments could indicate a wider economic downturn. Hicks said shipments had fallen sharply just before the last three U.S. recessions.

“The RV industry is a great bellwether of the economy,” said Hicks, because the vehicles are an expensive and discretionary purchase, easily delayed by consumers who start to worry about their financial stability.

Additionally, Reuters suggested that the RV industry is headed for a significant consolidation after several years of expansion, led to new factories, has oversupplied the market.

Managers at RV manufacturers and suppliers said President Trump’s trade war is why the industry is now crashing.

“The tariff price increases are what tipped the RV business — it started the landslide, no question,” said Tom Bond, the materials and purchasing manager at Adnik Manufacturing, an Elkhart-based division of Norco Industries.

Michael Happe, CEO of Winnebago Industries Inc, said tariffs had forced RV manufacturers to increase costs to dealers

Meanwhile, Thor Industries, which controls almost 50% of the North America RV market, reported its sales have dropped 23% in its fiscal third quarter, which ended in April, compared to a year ago. Production cuts and layoffs have been in full swing at some of Thor’s North American plants.

Thor assembler Demiris Jahmal Williams told Reuters his hours were cut, and his factory has been shut down through July.

“This is the worse I’ve seen it,” he said.

So there’s the paradox: while RV sales are crashing according to makers of RVs, the Bureau of Economic Analysis (i.e., the US government), used this very data set to represent that the US consumer is not only alive and well, but spending more than at any time in the past 5 years!

Surely when looking at such grotesque data manipulation, China can only stand in silent awe and watch as the US shows the world how data fudging is truly done, when the president has a political axe to grind and will steamroll any and all data just to prove that America is great again.

Authored by Michael Lebowitz and Jack Scott via RealInvestmentAdvice.com,

In a poll administered by the CFA Institute of America {Link}, readers, many of whom are professional investors, were asked which behavioral biases most affect investment decisions. The results are shown in the chart below.

We are not surprised by the results, but we believe a rational investor would put these in reverse order.

Compounding wealth, which should be the primary objective of every investor, depends first and foremost on avoiding large losses. Based on the poll, loss aversion was the lowest ranked bias. Warren Buffett has commented frequently on the importance of limiting losses. His two most important rules are: “Rule #1 of investing is don’t lose money. Rule #2 is never forget rule #1.”

At Real Investment Advice, we have covered a lot of ground on investor behavioral biases. In 5 Mental Traps Investors are Falling In To Right Now, Lance Roberts lucidly points out, “Cognitive biases are a curse to portfolio management as they impair our ability to remain emotionally disconnected from our money. As history all too clearly shows, investors always do the “opposite” of what they should when it comes to investing their own money.”

Lance’s quote nicely sums up the chart above. These same biases driving markets higher today also drove irrational conduct in the late 1920s and the late 1990s. Currently, valuations are at or near levels reached during those two historical market peaks. Current valuations have long since surpassed all other prior valuation peaks.

One major difference between the late 1920s, the late 1990s, and today is the extent to which the Federal Reserve (Fed) is fostering current market conditions and imprudent investor behavior. To what extent have investors fallen into the overconfidence trap as the herd marches onward?

This “ignorance is bliss” type of behavior raises some serious questions, especially in light of the recent changes in Fed policy.

Not QE

As predicted in QE By Any Other Name, the Fed recently surprised investors with a resumption of quantitative easing (QE). The announcement of $60 billion in monthly Treasury bill purchases to replenish depleted excess reserves and another $20 billion to sustain existing balances was made late in the afternoon on Friday October 11. With a formal FOMC meeting scheduled in less than three weeks, the timing and substance of this announcement occurred under unusual circumstances.

The stated purpose of this new round of QE is to address recent liquidity issues in the short-term funding markets. Up to this point, the Fed added additional liquidity through its repo facility. These are actions not taken since the financial crisis a decade ago. The liquidity problems, though not resolved, certainly have largely subsided.

So why the strange off-cycle announcement? In other words, why did the Fed seemingly scramble over the prior few days to announce a resumption of QE now? Why not wait to make this announcement through the normal FOMC meeting statement and press conference process? The answer to those questions tells us more about current circumstances than the actual policy change itself.

The Drowning Man

As is always the case with human beings, actions speak louder than words. If you observe the physical behavior of someone in distress and know what to look for, you learn far more about their circumstance than you would by listening to their words. As an example, the signs of drowning are typically not what we would expect.  A person who is drowning can often appear to be playing in the water. When a person in the water is in distress, their body understands the threat and directs all energy toward staying alive.

People who drown seldom flail and scream for help as is often portrayed on television. If you ask a drowning person if they are okay, you might not receive a response. They are often incapable of producing the energy to speak or scream as all bodily functions are focused on staying afloat.

Since the Financial Crisis, investors, market analysts, and observers are helplessly watching the Fed, a guardian that does not realize the market is drowning. The Fed, the lifeguard of the market, is unaware of the signs of distress and unable to diagnose the problem (see also The Voice of the Market – The Millennial Perspective).

In this case, it is the global banking system that has become so dependent on excess reserves and dollar liquidity that any shortfall, however temporary, causes acute problems. Investor confidence and Fed hubris are blinding many to the source of the turbulence.

Lifeguards

Fortunately, there are a few other “lifeguards” who have not fallen into the behavioral traps that prevent so many investors from properly assessing the situation and potential consequences.

One of the most articulate “lifeguards” on this matter is Jeff Snyder of Alhambra Investments. For years, he has flatly stated that the Fed and their army of PhDs do not understand the global money marketplace. They set domestic policy and expect global participants to adjust to their actions. What is becoming clear is that central bankers, who more than anyone else should understand the nature of money, do not. Therefore, they repeatedly make critical policy errors as a result of hubris and ignorance.

Snyder claims that without an in-depth understanding of the dollar-based global lending market, one cannot grasp the extent to which problems exist and monetary policy is doomed to fail. Like the issues that surfaced around the sub-prime mortgage market in 2007, the funding turmoil that emerged in September was a symptom of that fact. Every “solution” the Fed implements creates another larger problem.

Another “lifeguard” is Daniel Oliver of Myrmikan Capital. In a recently published article entitled QE for the People, Oliver eloquently sums up the Fed’s policy situation this way:

“The new QE will take place near the end of a credit cycle, as overcapacity starts to bite and in a relatively steady interest rate environment. Corporate America is already choked with too much debt. As the economy sours, so too will the appetite for more debt. This coming QE, therefore, will go mostly toward government transfer payments to be used for consumption. This is the “QE for the people” for which leftwing economists and politicians have been clamoring. It is “Milton Friedman’s famous ‘helicopter drop’ of money.” The Fed wants inflation and now it’s going to get it, good and hard.”

We added the emphasis in the quote because we believe that to be a critically important point of consideration. Inflation is the one thing no one is looking for or even considering a possibility.

Summary

Today, similar to the months leading up to the Financial Crisis, irrational behavioral biases are the mindset of the market. As such, there are very few “lifeguards” that know what to look for in terms of distress. Those who do however, are sounding the alarm. Thus far warnings go largely unheeded because blind confidence in the Fed and profits from yesteryear are blinding investors. Similar to the analogy James Grant uses, where he refers to the Fed as an arsonist not a firefighter, here the Fed is not the lifeguard on duty but the invisible undertow.

Investors should frequently evaluate a list of cognitive biases and be aware of their weaknesses. Humility will be an enormous asset as this economic and market expansion ends and the inevitable correction takes shape.  We have attached links to our other behavioral investing articles as they may be helpful in that difficult task of self-evaluation.

Finally, we must ask what asset can be a life preserver that is neither being chased higher by the herd nor providing any confirmation bias.

Gold is currently one of the most hated investments by the media and social media influencers. The only herd following gold are thought to be relics of ancient history and doomsday preppers. Maybe, as we saw in the aftermath of the prior valuation peaks, those who were ridiculed for their rigor and discipline will once again come out on top.

Gold provides ballast to a portfolio during troubling times and should definitely be considered today as the distress becomes more pronounced and obvious.

*  *  *

Please find below links to some of our favorite behavioral investing articles:  

Dalbar 2017: Investors Suck at Investing and Tips for Advisors

8 Reasons to Hold Some Extra Cash

The 5-Laws Of Human Stupidity & How To Be A “Non-Stupid” Investor

The Money Game & the Human Brain

The Definitive Guide to Investing for the Long Run

With Donald Trump tweeted shortly before today’s GDP print that it is “The Greatest Economy in American History!”…

The Greatest Economy in American History!

— Donald J. Trump (@realDonaldTrump) October 30, 2019

… speculation immediately emerged that the president was hinting at a stronger than expected GDP print. And sure enough, that’s precisely what happened when moments ago the BEA reported that in Q3, the US economy grew at a 1.9% annualized rate, well above the 1.6% expected, but still below the already weak Q2 print of 2.0%, and matching the second-weakest reading of the Trump administration.

 

The third-quarter increase in real GDP reflected increases in consumer spending, government spending, housing investment, and exports, while business investment and inventory investment decreased. Imports increased even though net trade subtracted from GDP for the second consecutive quarter.

The increase in consumer spending reflected increases in both goods (notably recreational goods and vehicles as well as food and beverages) and in services (led by health care and housing and utilities). Overall, personal consumption rose 2.9% in Q3, once again solidly beating expectations of a 2.6% print, after rising 4.6% prior quarter.

A curious observation: Personal consumption (which came at 1.93%) was 100% of Q3 GDP growth (also 1.93%). All other GDP components net to 0%.  Final sales to private domestic purchasers q/q rose 2.0% in 3Q after rising 3.3% prior quarter. Nonresidential fixed investment, or spending on equipment, structures and intellectual property fell 3% in 3Q after falling 1% prior quarter. Elsewhere, the increase in government spending reflected increases in both federal and state and local government spending. 

Some other details:

• Q3 Personal Consumption accounted for 1.93% of the bottom line GDP, which incidentally was also 1.93%.
• Fixed investment detracted -0.22% from the GDP print, the second consecutive quarter of declines
• Private inventories also subtracted from GDP, reducing it by -0.05%, also the 2nd consecutive quarter of declines
• Net trade (exports less imports) subtracted another -0.08% from the GDP print
• Offsetting all non-consumption components was government spending, which increased by 0.35% in Q3

And visually:

Separately, the BEA also reported that the GDP price index rose 1.7% in 3Q after rising 2.4% prior quarter, missing expectations of 1.9%, and suggesting that the Fed will likely proceed with another rate cut as its preferred inflation metric continues to shrink. At the same time, core PCE q/q rose 2.2% in 3Q – in line with expectations – after rising 1.9% in the prior quarter.

Overall, this was another goldilocks report, which while hardly confirming the “greatest economy in American history”, gave the Fed green light to proceed with more rate cuts today at 2pm.

Tim Apple should probably get together with Jamie Dimon and the heads of the other top Wall Street banks so they can get their economic projections straight (thereby perhaps delay whatever economic slowdown might lie ahead).

Because the consumer electronics giant is reportedly telling its suppliers to “mobilize” because Apple expects to ship more than 200 million phones in 2020, many with 5G capabilities, according to the Nikkei Asian Review, the Tokyo-based English-language paper that gets all the inside-track updates from Apple’s suppliers about the production whims of the mothership.

This is obviously one of the company’s most aggressive production targets in recent years, and a notable break with the company’s strategy of trying to shift investors’ focus to its growing services revenue. Smartphone sales have trailed off in recent years, yet Apple is setting some of its most aggressive sales targets in recent memory, suggesting that the company doesn’t expect the American economy to slide into a recession before election day.

The company is also hoping that its “aggressively priced” three-model suite of 5G phones, due out late next year, will help it steal back the mantle of world’s No. 2 handset maker from Huawei (Samsung has held the No. 1 spot for years). Come to think of it, that might rank as a national security priority in the White House.

According to the NAR, Apple’s shift to 5G marks a change from the company’s earlier reluctance: Its last batch of phones wasn’t 5G compatible, despite the fact that Samsung and several Chinese companies have released their own 5G compatible models.

And at a time of upheaval for the global supply chains of its suppliers, Apple is telling them to tool up and get ready for more than 80 million 5G phones, which is around the high-end for the company’s annual sales of new models in recent cycles.

But the message from Apple could not be clearer: There won’t be a recession next year…not if Cupertino can help it.

APPLE SAID TO EXPECT MORE THAN 200M HANDSETS SHIPPED IN 2020

So… apple does not expect a recession in 2020?

— zerohedge (@zerohedge) October 30, 2019

However, savvy investors must look deeper, and considering all that is going on in the world, and the US in particular, it would be reasonable to suspect that Apple’s plans for a grand 5G rollout might have been born more out of hubris than wisdom. Apple is nervous, the company feels like it’s falling behind on 5G, and it’s making a  big commitment to step up.

The company typically ships between 75 and 80 million of its new iPhones each year. A total 206 million new 5G phones will produced worldwide in 2020, MIC estimates, representing around 18% of all new smartphone sales.

“Apple is lagging behind somewhat in introducing 5G products and it definitely wants to catch up,” Joey Yen, a tech analyst at market research agency IDC, said. “5G is one of the fanciest marketing buzzwords around … [especially] in such a mature and competitive market. It is a feature that can grab consumer attention and [allow companies to] claim they are technology leaders.”

Why? Because according to NAR, the company is already preparing to cannibalize sales of the 5G models by rolling out a new budget-conscious iPhone SE model next spring.

However, Apple’s launch of a premium 5G iPhone lineup could pressure its recent pricing approach to the smartphone market. This has emphasized affordability following a sales slump in 2018 that saw Huawei overtake it as the second-biggest smartphone maker in the world.

As such, Apple also plans to roll out a more cost-effective iPhone SE next spring as part of its strategy to keep targeting budget-sensitive consumers, especially in emerging markets such as China, as Nikkei previously reported.

“Apple is more prepared than previous years to face strong headwinds in China,” Louis Liu, research analyst at Shanghai-based Canalys, said.

“But it [still] faces a looming challenge, as Chinese vendors and operators are set to drive heavy marketing and promotions around 5G in the next two quarters. This could steal its thunder.”

The leak comes just hours before Apple posts its Q4 earnings after the market closes on Wednesday, which will offer the first glimpse into how the iPhone 11 has been selling.

Deutsche Bank stock tumbled – again – after the bank reported its steepest drop since CEO Christian Sewing’s sweeping revamp in early July as Q3 fixed income trading results badly trailed its Wall Street rivals in the latest sign of the steep hurdles Germany’s biggest lender faces in its efforts to turn round the fortunes of its investment bank.

Revenue in the bank’s once iconic fixed income group — by far the biggest remaining unit of Deutsche’s downsized investment bank — tumbled 13% year-on-year to €1.23bn.

Deutsche blamed the decline in its FICC group on low market volatility in foreign exchange markets. It also pointed to “business restructuring and challenging market conditions” in its rates unit, which handles sovereign bonds and other related products, and emerging markets debt which triggered “some risk management losses”.

The bank’s new strategy – which now also includes a “bad bank” to house its troubled assets – marks the biggest cutback to the investment bank since Deutsche Bank built up the business in the 1990s. While top shareholders and regulators have signaled support, analysts have warned of execution risks. The bank already had to walk back a revenue target as the slowing economy made it unlikely that interest rates will rise soon.

The punchline: the investment bank’s overall pre-tax profit tumbled 73% to €64 million; due to a change in its financial reporting structure and the restructuring, analysts could not even reach a consensus on what the number should be prior to the quarterly results, so it wasn’t clear if this was a beat or a miss.

As the FT notes, the ongoing decline in revenue is further confirmation that Deutsche is falling behind its large US rivals which on average reported an 11% increase in the metric. Overall income income from its remaining businesses fell 4% from a year ago as all but one unit suffered declines.

At the group level, a 15% fall in revenue and restructuring costs led to a second consecutive net loss of €832MM in the quarter.

While the core bank generated €352MM in pre-tax profit, Deutsche’s bad bank, which is home to the group’s unwanted assets, sustained a €1bn loss before tax. What is even more bizarre, the “bad bank” posted negative revenue of €223 million in the quarter.

It wasn’t all bad: among the bright spots was the corporate bank, which sells risk management and trade finance products to large companies. The unit saw revenue increase 6% in the quarter. The business of advising companies on deals and raising capital reported a 20% jump. The DWS asset management unit attracted 6.2 billion euros ($6.9 billion) in new money, the third straight quarter of net inflows.

Commenting on the results, JPMorgan analysts Kian Abouhossein and Amit Ranjan said that “negative revenue in non-core could lead to material EPS cuts” and pointed out point that IB, corporate bank and AM outperformed, while the private bank disappointed; they also said the most important questions are around the Capital Release Unit, or CRU, as it has negative revenue while bank had previously said it was generating revenue.

Trying to spark some optimism about its results, the bank said its asset disposals were on track. It also reconfirmed its cost-cutting target for the full year. CEO Christian Sewing stressed in a statement that all four core business units were profitable “despite having launched the most comprehensive restructuring of our bank in two decades”.

That, however, was hardly comforting to DB’s (former) employees: for the first time since the acquisition of German retail bank Postbank a decade ago, the FT pointed out that the number of employees has fallen slightly below the symbolic threshold of 90,000.

Deutsche Bank shares fell tumbled as much as 7.1%, the biggest drop since July, as the results underscored the uphill battle it is fighting as CEO Sewing seeks to reverse years of revenue contraction and low profitability. Meanwhile, negative interest rates and a slowing economy have blindsided the CEO, while the investment bank is struggling to regain market share in debt trading after years of piecemeal cutbacks.