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Submitted by Jacob Hess via OilPrice.com,

The Chinese slowdown did more than drag down its own economy, it singlehandedly created financial tremors throughout the global financial markets. With consistent growth rates well over 6 percent, China's economic health is an integral part of global expansion.

But just last year, investors saw the disintegration of billions of dollars’ worth of wealth on the Asian giant's stock market. The globalized economy experienced economic withdrawals with lagging Chinese demand, a substance to which both foreign and local industries have become addicted. It goes without saying that industrial and manufacturing demand in the Chinese economy acts as a relevant indicator of the world's financial condition, similar to the status of the United States. For that reason, investors have no choice but to realize the implications that can come from changes in demand for Chinese goods, services, and capital.

A country's stock market is often a leading indicator of its economic performance. In China, two dramatic corrections occurred in the middle of 2015 which translated to the weakness that would infect the global economy. From its peak last year, the Shanghai CSI 300 Industrial Index has lost over 50 percent of its value in a downtrend that has depressed sentiment surrounding the industrial and manufacturing sectors in China. The downtrend has softened but continues to devalue large-cap industrial shares approaching values seen in mid-to-late 2014. As far as projections go, the stock market appears to be an indicator of a contraction in demand. Investors looking to pump capital back into these Chinese firms need to consider the bubble-like symptoms that caused four freefalls in the past year.

The China Caixin Manufacturing PMI is one of the most watched industrial economic indicators for domestic and global demand trends. The index tracks the monthly growth of the manufacturing sector, one of the largest components of China's GDP. Readings above 50 translate to expansion while readings below 50 represent contraction. February 2015 was the last month where an expansion was reported before the drop that occurred later in the year. Just after the major correction in August 2015, the September reading was recorded at its lowest point, 47.0. From there, the contractions have been slowly shrinking to just below 50 in March 2016.

The worst of the losses look to be over with a trough most likely formed in late 2015. The next milestone for recovery will be getting the PMI back into positive growth territory. Demand will only fully come back online when the levels of mid-2014 are approached. But, at the very least, the worst could be over, as the corrections have successfully repriced the stock market in relation to the country's manufacturing strength.

When the Chinese manufacturing and industrial sectors are strong, their consumption of raw materials, machinery, and just about anything else is equally as robust. China is highly dependent on heavy industry, which made up 40 percent of the economy in 2014. As the slowdown set in, businesses started to import less. In April 2016, Chinese imports dropped by 10.9 percent to $127.2 billion, a 30.6 percent slide from the March 2013 peak of $183.1 billion. Moreover, imports may never recover to their peak levels. The Chinese economy is undergoing a transformation, and the emergence of a service sector is allowing China to shift away from a reliance on heavy industry. For global exporters of commodities and industrial materials, the shrinking of the world's largest source of demand is bad news.

Nowhere is this more evident than in the Chinese energy sector, as crude oil accounts for about 6 percent of total imports. According to EIA data, members of OPEC already account for 58 percent of China's oil supply with its leader, Saudi Arabia, the highest at 16 percent. Saudi Arabia’s revenues have plunged because of low oil prices, forcing the Saudi government to cut spending on social programs.

Now, the slowdown in Chinese demand as it builds up its service sector, combined with a global push towards renewable energy, could further threaten the already fragile levels of Chinese oil consumption. On top of that, China has pushed to diversify its sources of imports, another challenge to Middle East suppliers. China has already exchanged the volatile supply of Sudan, Iran, and Syria for deals with its neighbor, Russia. More shifts could be due in the near future and here's who may be affected:

Saudi Arabia, Angola, and Oman are all countries that supply at least 10 percent of China's crude oil. But recently, the Wall Street Journal reports that Russia has overtaken the trio to China’s top supplier. In the first quarter of 2016, Saudi Arabia's exports to China have only increased by 7.3 percent despite low oil prices, which should encourage larger increases in consumption. In a world of abundant supply, OPEC members will fight each other for market share in China, especially if Iranian capacity increases rapidly and a cheap energy environment settles in for the long run. The disinterest of the cartel's biggest customer could mean a more competitive market, or worse, the disintegration of OPEC.

 

Russia has had the advantage of being on good terms with China while they shift their supply chains to more secure channels. Deals like the $400 billion agreement between the Chinese government and Russia's Gazprom have given their neighbor preferred access to China. As Saudi exports fell, Russia logged a 42 percent increase in crude oil shipments to China in the same period. Russia has seduced Chinese customers with discounted crude as well as deals done in yuan, whereas most of global oil deals are conducted in dollars. The new partnership has increased tension present in the rivalry between OPEC and non-OPEC members. The shift in Chinese imports might convince Saudi Arabia and its peers to increase production, a threat already used by Saudi crown prince bin Salman. But has Russia won this "race" before it began? According to the EIA, Russia and China have signed a deal to send "up to 800,000 b/d of crude oil by 2018." With the country securing more demand for its enormous oil and natural gas stocks, they might be in prime position to benefit from a stabilization, or maybe a recovery, in energy prices.

 

The United States is in a unique position in this changing market. With shale production spurring a renaissance in domestic supply, the world's second largest oil importer now has options on the supply side. Energy independence (no imports) may never be in the equation, but the U.S. could begin to balance their energy trade deficit with the ban on exports lifted. However, the shrinking discount between WTI and Brent means that it becomes cheaper to import oil. Also, weak Chinese demand is keeping oil prices low, and the shale revolution is withering away as a result.

The days of global reliance on Chinese demand are soon coming to end as seen by the decline in growth rate, decline in imports, and increase in service sector strength. The implications have already been great as stock markets across the developed world fell into peril when China's GDP growth rate fell below 7 percent.

Withdrawal symptoms may last for a while until a recovery in demand alleviates some pressure. But global financial markets will have to adjust to a developed China, and as this "new normal" sets in, it will mean softer demand for commodities. China’s slowing demand for oil will lead to heightened competition for suppliers. For now, it appears that OPEC’s loss is Russia’s gain. The energy players and other foreign businesses that once relied on China's robust growth will no longer be able to depend on its expanding demand. A new group of emerging economies will have to step in. Who will they be?

via http://ift.tt/257khYn Tyler Durden

One recurring theme observed throughout the oil rally since the February 13 year lows, has been increasingly more aggressive hedging action by producers, who are willing to give up upside gains in order to protect from yet another swoon lower in prices. And, as Goldman cautions in its latest note on ongoing imbalances in the oil market, “the rally in long-dated prices has taken prices to levels ($50/bbl in 2017) where hedging activity is ramping up which suggests it will soon stall.”

This can be seen in the following chart of overall hedging activity by oil explorers which as of this moment is the highest since mid-2011.

Overnight Bloomberg confirmed this trend when it reported that producers and merchants increased their short position in WTI by 3.8% for the week ended May 10 to the highest since September 2011. It adds that “oil producers are taking advantage of the rebound in crude markets to lock in protection against another slump. They increased their bets on falling prices to the highest level in 4 1/2 years as U.S. inventories of stored oil remained near an 87-year high, while a natural disaster in Canada and militant attacks in Africa curtailed output. Negative sentiment among the group expanded for a third consecutive week, the longest streak since February.”

Energy companies from EOG Resources Corp. to Chesapeake Energy Corp. used financial instruments such as futures, swaps and collars to guard against another fall in prices. West Texas Intermediate oil, the benchmark U.S. crude, has gained more than 75 percent since hitting a 12-year low in mid-February.

As Again Capital’s John Kilduff chimes in producers “have been getting more and more active in hedging ever since the first initial jump,” adding that they “appear to be drawn to this market as everyone tries to stay alive through the downturn.”

For now, however, the market is less focused on what oil producers themselves are expect from the future price of oil, and far more concerned with transitory oil disruptions in the crude market as highlighted by Goldman, and which as we observed earlier, has taken out about 1.5 million barrells from the market for the time being.

 

At some point in the coming days, attention will return to oil hedging, which appeared to be finally driving prices last week, although today’s news have pushed oil to fresh 6 month highs. “The failure to rally on bullish news was a bearish indicator, at least for a handful of sessions,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The market still looks relatively overbought.”

As Evans adds, “Some subset of managed accounts have been trying to pick a top in crude. We’ve been rallying for months so the question is, ‘Are we in the middle or late stages of the rally?'”

Our own view is one we shared a month ago: the price action this summer will closely follow that of the summer of 2015, at which point all the relentless hedging will allow US production to be unleashed, and crush Goldman’s near-term rebalancing thesis, and lead to millions more barrels coming online, potentially at the same time as all the temporary oil market disruptions are also normalized. Unless, of course, some central bank openly admits it will begin monetizing oil in which case all bets are off.

On the other hand, one oil and gasoline prices anniversary their base effect and start rising, it will be interesting to watch the Fed and central banks respond as energy prices suddenly spike, sending various CPI indicators far higher and forcing a return of the infamous tightening language.

via http://ift.tt/1Xg0C2p Tyler Durden

In a word… "yes," VIX is too low based on the fundamentals underlying the economy, according to Goldman Sachs.

Mapping VIX back to the economy: Our research indicates that changes in the unemployment rate, ISM new orders and consumer spending are three macro variables with explanatory power for modeling S&P 500 realized volatility and VIX levels across the business cycle. Although the VIX is often considered a “sentiment indicator”, a regression of average calendar month VIX levels on these three factors explains 58% of the variability in VIX levels back to 2000. The economic data currently suggests VIX levels of 18.5, about 4 points higher than the average VIX level in April and May.

VIX Scenarios: The exhibits below show simple two-factor models that predict average VIX levels using yoy change in the unemployment rate under our forecasts and the level of either the ISM manufacturing…

 

Or ISM non-manufacturing indices..

 

The ISM manufacturing index currently stands at 50.8 and the nonmanufacturing index at 55.7; suggesting average VIX levels in the 17-20 range.

 

Identifiable headwinds include: higher valuation, positioning, waning buyback demand, potentially hawkish Fed surprises, negative growth surprises and event risks including “Brexit” and the U.S. election. This long list of potential risks skews the distribution of risks to the downside, and after a hefty rally, it seems easier to see the index 5% or perhaps 10% lower rather than higher.

May VIX levels in the low-teens may be pricing further economic improvement or a lower likelihood of Fed action.

via http://ift.tt/1XfYCqW Tyler Durden

Submitted by Ingrid Carlqvist via The Gatestone Institute,

April was the month when the Islamist scandals in the Green Party (Miljöpartiet) came one after the other. The Green Party sits in Sweden's government, along with its coalition partner, the Social Democrats (Socialdemokraterna). They have made themselves known as a party favoring open borders, and with a passionate love for multiculturalism. These infatuations are precisely why the party has been a perfect candidate for Islamist infiltration. Within the Green Party, even to ask the question whether Muslims view Islam as a political force has been considered rude and "Islamophobic."

One Month of Islam and Multiculturalism in Sweden: April 2016

On April 17: Housing Minister Mehmet Kaplan was forced to resign after it was reported that he not only socialized with Islamists and fascists, but also compared Israel's treatment of Palestinians with Nazi Germany's treatment of Jews.

April 20: A would-be member of the Green Party executive, Yasri Khan, refused to shake hands with a female TV reporter, Ann Tiberg, causing much hoopla and eventually forcing Khan to resign.

April 22: The scholar Lars Nicander of the Swedish Defense University warned that the Green Party may have been infiltrated by Islamists: "It is obvious they are trying to get in and ascend to positions of trust," Nicander told the daily Aftonbladet.

Anders Wallner, Secretary of the Green Party, commented on Nicander's remarks:

"What is being put forth by Lars Nicander is something we take very seriously. Extremism has no place in our party, something our spokespersons have been very clear about."

April 23: Semanur Taskin, spokesperson for the Green Youth (the Green Party's youth wing) in Stockholm, decided to drop out of politics. As a Swedish Muslim, she said, she felt "misunderstood and no longer secure in politics." Taskin is also a member of an organization founded by Mehmet Kaplan — Swedish Muslims for Peace and Justice (Svenska muslimer för fred och rättvisa). The organization is best known for working for Muslim rights in Sweden; participating in "Ships to Gaza," and criticizing all things they perceive as "Islamophobic" or the government's work against Islamism.

April 24: It was reported that the spokesperson for the Green Youth in Malmö, Salahaden Raoof, could be seen giving the so-called Rabia sign — a four-fingered salute in support of the Muslim Brotherhood — on live television, filmed during a political convention at Almedalen in 2015. He was, however, allowed to retain his post after stating that he "will not do it again."

Salahaden Raoof (left), spokesperson for the Green Youth in Malmö, Sweden, appeared on live TV giving the Rabia sign — a four-fingered salute in support of the Muslim Brotherhood. He was allowed to retain his post after stating that he "will not do it again." Pictured at right: Mohamed Morsi, a Muslim Brotherhood leader and Egypt's deposed president, popularized the Rabia sign.

April 27: Local Green Party politician Kamal al Rifai from Burlöv announced he was taking a time out from politics — after attracting much attention for inviting a world-famous Salafist, Salman al-Ouda, to speak at an event in Malmö for the benefit of the children of Syria. Al-Ouda is known, among other things, for being the mentor of Osama bin Laden. He later renounced bin Laden and now preaches a "peaceful transition to sharia."

May 3: Mohamed Temsamani of the Green Party (Solna) was also identified as an Islamist. It emerged that he had been active in a political party connected to the Muslim Brotherhood, and had been seen giving the Rabia sign.

April 29: The author and social commentator Johan Lundberg wrote in the daily Göteborgs-Posten:

"The examples of associations and organizations with an Islamist agenda, who have received state subsidies and won the hearts of Green Party Ministers abound. How then, do you explain the Green Party dedication to conservative Islam? One explanation is the common view of identity politics, norm criticism and diversity in the sense of ethnicity, which has led to a troublesome blindness to extremism."

Other Islamic and Multicultural News in Sweden in April

April 1: An Afghan man claiming to be a child was placed in an institution for youths, where he raped a 15-year-old girl. The man came to Sweden at the end of last year, and applied for asylum on December 14. The next day, he was arrested for raping a girl at the home for youths with psychiatric problems, where he had been placed. The girl had several times reported that the man (who later turned out to be at least 19 years old) was uncomfortably intimate towards her. Even so, they were left alone one night in front of the television. When the staff came back, they saw the Afghan raping the crying girl. He has now been sentenced to forensic psychiatric care and deportation.

April 4: A large police search was called to look for an Iraqi citizen, Ramin Sherzaj, 23, who was abducted against his will in central Gävle. He was pulled into a car, which, with "screeching tires," disappeared from the site. Sometime later, five Iraqis who came to Sweden early this century were arrested: one woman and four men. Two weeks later, Sherzaj's dead body was found. In all, seven people have now been taken into custody in connection with the murder.

April 4: Polygamy is against the Swedish constitution's demands for equality and totally foreign to the Swedish legal system. Still, Swedish authorities have approved hundreds of polygamous marriages, law professor Göran Lind revealed. Men bringing several wives to Sweden have had their marriages approved. Göran Lind says that Swedish courts need to stop approving these marriages:

"This can create big problems if, say, an Iraqi man with three wives dies. Do all three have marital rights to the estate? Are they to share the half a monogamous widow gets or is the estate to be shared some other way? And are the children shared, or children from previous marriages?"

April 5: A Somali known as "Muhamed" was sentenced to community service for 180 hours, after brutally raping a 12-year-old girl. "Black dick is expensive," he commented during the rape. Now the girl is being stalked, threatened and physically abused by Muhamed's friends and family. The local daily Sundsvalls Tidning interviewed the girl, who told the paper about how she ran into the perpetrator's family at a bus stop, and was beaten by one of his brothers:

"There came the other one, who I have a restraining order against, and I thought he was going to help me get up, but he punched me on the mouth with his fist. Then his mother came and I thought they would quit, but she kicked me, too."

April 6: The Swedish National Audit Office, in its yearly review, criticized the Immigration Service on several counts. Members of the Audit Office wrote in their report that there was a risk of corruption. The auditors complained about a lack of policy documents and clear routines, and that the case officers can pick and choose which errands they want to process — opening up opportunities for corruption.

April 7: A 20-year-old Muslim medical student, Aydin Sevigin, was prosecuted for planning to blow himself up in Sweden in a terrorist attack. According to the prosecutor, Sevigin could have caused serious damage. When the trial started on April 15, Sevigin seemed unperturbed when the prosecutor read a passage about how one becomes a jihadi one-man army. He admitted to the police that he wants to die a martyr. Among the evidence presented against him are pictures in which Sevigin can be seen buying bomb-making ingredients at an Ikea store.

April 8: The Immigration Service released a new report, entitled "Are You Married?", which showed how its own case officers allow child marriages. The report highlighted several cases where the officers did not ask any questions whatsoever, despite dealing with married 16- to 17-year-old girls.

The Immigration Service wrote:

"The Immigration Service has a duty to investigate, and questions about the marriage should be asked, regardless of whether a married child points to this circumstance as a factor in his or her need for protection or not."

The report also noted that there is no comprehensive view or analysis of what is in the best interest of the child. Rules are not followed, and reports to Social Services and the police are not being filed to the extent that they should be.

April 10: For many years, the Swedish National Council for Crime Prevention (Brottsförebyggande rådet), BRÅ, has claimed that the lethal violence in Sweden is on the decline. However, BRÅ failed to mention that this is in comparison to the record-breaking years, 1989-1991. If one instead were to compare the present with the 1950s, when Sweden was still a homogenous country, the number of murders and manslaughter cases has doubled. Recently, BRÅ was forced to confess that lethal violence did in fact increase in 2015, when 112 people were killed: 25 more than the year before. 2016 appears on track to top that — during the first three months of the year, 40 murders and 57 attempted murders were committed in Sweden, according to statistics compiled by journalist Elisabeth Höglund.

April 11: The New Welfare (Den Nya Välfärden), a think tank, presented an opinion poll that showed 70% of Swedes now think immigration is too high. In 2014, only 45% felt this way; in 2015, 58%. The poll also showed that the difference in opinion between people with higher education and blue-collar workers continued to shrink. The largest increase in critics of immigration is found among academics.

April 11: The library in Arvika surprised patrons by offering Arabic language courses. Many Swedes wondered if offering courses in Swedish to the Arab-speaking immigrants would not be more productive. The library, however, does not offer any such service. Library representatives wrote in a press release:

"As part of our work to create meeting points, bolster integration and increase knowledge of other cultures, peoples and languages, the Arvika Library and the Education Association NBV are now giving a course in Arabic at Arvika Library."

April 12: A 33-year-old Arab man and a 34-year-old Turkish woman were prosecuted for a brutal murder in Malmö in the summer of 2015. The victim, a middle-aged Swedish man, had let the woman stay with him at his apartment in central Malmö. The woman was the one who called the police after the murder. However, the prosecutor believes that the murder actually took place 24 hours earlier, and that by the time the police arrived, the crime scene had been "scrubbed." Both suspects have entered a plea of not guilty, and blame each other for the murder. Their motive remains unclear.

April 14: Gambian citizen Baboucar Mboge, 21, was sentenced to one year in prison for rape, robbery and minor drug-related offenses. He was also sentenced to pay 125,000 kronor (about $14,000) in damages to the woman he raped and mugged. The rape took place four years ago, but it was not until Mboge became a suspect in a robbery against a convenience store in Stockholm that his DNA could be tied to the rape. When questioned by the police, the Gambian claimed that the girl had consensual sex with him on a lawn, and he bragged about "f**king for over ten minutes." The prosecutor did not ask for deportation.

April 14: Many Muslims in Sweden have been granted damages by the Discrimination Ombudsman (Diskrimineringsombudsmannen), DO, after their refusal to shake hands has led to them not getting a job for which they have applied. But the woman who refused to shake a doctor's hand, leading to her not getting the physical examination she wanted, did not get any money. The Hässleholm Municipal Court previously convicted the doctor and the company he worked for, and sentenced them to pay the woman 75,000 kronor (about $8,700) in damages, but the verdict was reversed in the Court of Appeals, which said that the DO could not prove that the missed physical examination was due to the woman not shaking the doctor's hand.

April 14: A 27-year-old scientist at Uppsala University was arrested, suspected of selling poison, munitions and narcotics online. The man, nicknamed "Chemical Ali," is a German citizen of Turkish descent. He was arrested on suspicion of drug-related crimes, preparing to spread poison (aggravated offense) and breaking the munitions law. He was also suspected of attempted aggravated extortion after sending someone a poisonous substance "while trying to blackmail them."

April 14: A Syrian asylum seeker was sentenced to two years in prison and deportation for having assaulted a woman in January, at an asylum house in Leksand. The woman had locked herself into a bathroom, but the 34-year old man managed to pick the lock, pull her out, rip off her clothes and rape her. During the rape, the man pulled his victim's hair and beat her. She retaliated by biting his finger and shoulder. It was only when the man saw his wife outside the window that he stopped.

April 16: When local politicians of the Stockholm suburbs of Spånga-Tensta met the would-be neighbors of a planned asylum house for 600 people, the mood was close to that of a lynch mob. The citizens were concerned about the asylum house, planned right next to a school: "We will fight to our last drop of blood to make sure this plan is not carried out," said one man, to uproarious applause.

Despite agitated feelings, the politicians had no answers, making the people even more upset. Several shouted: "Answer! Answer our questions! Why are you doing this? Where is your analysis? Are we to risk our children's health?"

April 17: A soccer tournament for "unaccompanied refugee children" in Jämtland ended in a mass brawl, involving 40 people fighting with iron bars and wooden sticks. At least one person had to be taken to hospital. The police investigation turned up at least seven suspects in the case. "It is plaintiffs and suspects all jumbled together," police officer Cecilia Modin told local paper, Länstidningen. A couple of days later, the municipality decided not to host any more soccer tournaments for "unaccompanied."

April 23: An immigrant from the Middle East, Ali Al-Ali, at first evaded being sentenced for kidnapping and robbing a taxi driver as he was, according to public record, only 14 years old at the time the crimes were committed. His two accomplices, who both received six months in juvenile detention, but avoided deportation, stated to the court that Ali Al-Ali is older than 18, and frequently brags about fooling the Swedish authorities. Two days after the sentence, Ali Al-Ali was arrested at a shopping mall in Malmö. At the time, he was accompanied by two other youths, carrying firearms, knives and a balaclava. The other two youths escaped the scene, but Ali Al-Ali, suspected of preparing an armed robbery, is now in police custody.

April 23: The political news editor of the local newspaper, Eskilstuna-Kuriren, Alex Voronov, posted a picture of himself giving the Rabia-sign — four fingers in the air as a salute to the Muslim Brotherhood (MB) — on Twitter. "I have met several MB-politicians who are now behind bars after mock trials," Voronov tweeted, "and this is of course something that concerns me."

The paper refused to comment on its editor's message.

April 23: An asylum seeker from Hagfors was arrested, suspected of, among the things, having kicked his wife in the head. According to the police, the man became angry with his wife because she was trying to learn Swedish. The couple needed interpreter assistance in Dari, a language spoken in Afghanistan.

April 28: After brusquely rebutting a proposal by the Sweden Democrats (SD) to eliminate the two-week long suspension of Sweden's border controls, the government suddenly announced that the border controls would not be suspended after all. The decision was welcomed by the SD, whose members are critical of immigration, and who assert that border-controls issue has been handled appallingly.

Kent Ekeroth, an SD representative and member of the parliament's Justice Committee, stated:

"It is pretty comical how the other parties time and again vote no to our motion to remove the waiting period in connection with the identity checks, but it is good that they are now following our lead point by point and copying our suggestions."

April 27: A 34-year-old Somali, who raped a woman in Gothenburg last year, was sentenced to five and a half years in prison. The man pulled a dark hood over the woman's head, held a knife to her throat and threatened to kill her. Then he ripped off her clothes and raped her. Afterwards, he stole her cell phone and said, "You could get 10,000 kronor if you come home with me and I could f**k you for a whole day." Despite the court's assertion that his crimes are of "a most serious nature," the man will not be deported.

April 30: The mosque of Imam Abo Raad, identified as the foremost "militant Islamist leader in Sweden," was subjected to a firebomb attack. The Islamist mosque, located in Gävle, has been highlighted in the local paper, Gefle Dagblad, in a series of articles beginning in the fall of 2015. On March 30, it also emerged that Gefle Dagblad's editor-in-chief, Anna Gullberg, had received death threats from a close relative of Abo Raad. "This is a direct threat against the freedom of the press," Gullberg said. "The threats are obviously connected to the articles Gefle Dagblad has published."

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In recent days we have witnessed a massive outflow from virtually all holders of stocks. Just last week we reported that retail had just dumped the most stocks in the past 5 weeks since the August 2011 US downgrade…

… confirming a long-running trend observed with BofA smart money clients who, as we also reported last week, have sold stocks for 15 of the past 15 weeks, the longest selling stretch on record.

This has repeatedly prompted many to wonder who is buying.

The one recurring answer (assuming it is not the BOJ buying the SPY directly or the NY Fed instrucing Citadel to intervene in the market at key inflection points) is corporate stock buybacks. Recall, that as Goldman pointed out a month ago, “buybacks will remain the key source of equity inflow in 2016” adding that “corporations will purchase $450 billion of US equities in 2016 and will remain the largest source of US equity demand.”

However, that one particular bullish outlook on the only real buyers in the stock market, i.e., corporations repurchasing their own shares, may be in jeopardy, because as it turns out, after snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes. Bloomberg cites research by Birinyi Associates according to which announced repurchases dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009. 

As Bloomberg adds, planned buybacks among American firms tumbled from a year ago by $147 billion, an amount equal to 2.5 times the profit S&P 500 companies lost in the 12 months through March. Needless to say this is a big hit to S&P EPS where buybacks have traditionally provided a substantial boost to the declining denominator while the numerator has been steadily shrinking over the past several years alongside the biggest unspoken secret on Wall Street, namely shrinking cash flows and sliding profits.

This is troubling because coming amid the worst profit slump since the financial crisis, the buyback slowdown, long the only source of support for the stock market, may signal companies are preserving cash as economic and political uncertainty whips up from Europe to China and in the U.S. At stake is the primary source of buoyancy for the second-longest bull market in history, at a time when individuals and money managers are bailing out and valuations sit near 14-year highs.

Traders are worried: “If the only meaningful source of demand in the market is companies buying their own shares back, then what happens if that goes away?” said Brad McMillan, chief investment officer of Commonwealth Financial Network in Waltham, Massachusetts, which oversees $100 billion. “We should be concerned.”

In addition to buybacks, companies are also slashing dividend payments. “As profits fell for a fourth straight quarter, the number of firms slashing dividends rose to a seven-year high. Executives are scaling back after handing out sums of cash that exceeded their earnings, an act that has drawn criticism from politicians. Presidential candidate Hillary Clinton said in July that companies’ focus on share prices is hurting the economy because it lowers investment.”

 

Some are urgently trying to justify the collapse in buybacks:

The first-quarter slowdown was mostly executives responding to the economic and credit stress earlier in the year, according to Joseph Amato, chief investment officer of equities at Neuberger Berman LLC in New York, where the firm oversees $243 billion. As the fear subsides, buybacks are likely to stay elevated, he said.

 

“The scare in the first quarter was overblown,” Amato said. “The economy is growing on the global basis at a reasonable level. That, in our mind, would suggest that companies will come back and have a typical buyback program consistent with levels of the last few years.”

To be sure, a sudden surge in debt issuance in recent weeks on the heels of the ECB’s backstop fo European and thus global Investment Grade bonds may unlock the next big rounds of buybacks. The likelihood that companies will increase spending as the year progresses was highlighted in a May 12 note from David Kostin, the chief equity strategist for Goldman Sachs Group Inc., who predicted that repurchases will increase 7% in 2016 and remain the primary source of U.S. stock demand.

The problem is if repurchases do not rebound. Announced buybacks are blueprints that cover strategies for two or three years and hence loosely correlate to the amount of repurchases that are executed, with actual buying equaling 81 percent of authorized since 1985. Should the ratio hold and the pace of announced buybacks keep through December, repurchases would fall below $600 billion for the first time in three years. Buybacks hit a record $762 billion in 2007.

The worst case scenario is if companies, already encumbered with record leverage, are simply unable to issue any more debt, whose proceeds would normally be used to fund repurchases. it would also mean that management teams are increasingly bearish on growth prospects.

“Pulling back on buybacks is company management telling us they are either not optimistic or more pessimistic than they were in the past and they’re doing it through their actions,” said Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, which manages $7 billion. “It may be a harbinger of a weaker outlook on behalf of management for company prospects going forward.”

Adding insult to injury, the buyback slowdown takes place when the potency of buybacks is waning. After beating the market by at annualized pace of 3.5 percentage points in the four years through March 2015, the S&P 500 Buyback Index that tracks stocks with the highest payout ratio has since trailed the broad measure by almost 10 percentage points. CFOs are certainly aware of the fact that the market is increasingly punishing companies that buyback at the micro level, even if it rewards the overall market at the macro.

The conclusion, as summarized by Bloomberg, is that a weakening in corporate demand could tilt the market’s supply and demand balance in favor of bears. U.S. firms have been the biggest buyer of stocks every year since 2009, with their net purchases exceeding $2 trillion.  Their role in keeping the bull market afloat is more pronounced this year. According to Bank of America Corp., the firm’s trading clients from hedge funds to wealthy individuals were net seller of stocks for 15 straight weeks through May 6, a record streak. The only buyer was corporations scooping up their own shares.

“Companies have been a fairly consistent buyer that has supported the late stage of this bull market,” Channing Smith, a managing director at Capital Advisors Inc. in Tulsa, Oklahoma, said by phone. The firm oversees about $1.6 billion. Their potential retreat means “there is less firepower to counter any type of bout of selling,” he said.

Maybe there is hope in corporate earnings? Alas, no. As we showed yesterday, following an abysmal Q1 earnings season, Q2 is already shaping up as the 5th consecutive quarter in which Y/Y EPS are poised to drop. A streak that long has not happened since the financial crisis.

Finally, recall that while non-GAAP earnings are down sharply, non-GAAP profits – a proxy for true profit margins and cash flow – has collapsed. As we showed just last night, the spread between GAAP and non-GAAP earnings is now the widest it has been since 2008.

If, indeed, buybacks are now also off the table, then central banks – beyond merely the BOJ and SNB who already do that on a day to day basis – will have no choice but to directly step in and monetize not just bonds (and perhaps commodities) but also stocks. At that point, the case on whether there is a “market” or merely a “monetary policy tool” will finally be closed.

via http://ift.tt/1ZYvL9S Tyler Durden