Category: zerohedge

Authored by Mike Shedlock via MishTalk.com,

We need to rename Biden’s proposed “American Family Plan”. I present the perfect name below.

Biden Is No Moderate

President Joe Biden proved beyond a shadow of a doubt that he is not a moderate. His proposed $1.8 Trillion “American Family Plan” speaks for itself.

The above link contains the know details ahead of his Wednesday address to Congress and the nation.

Wednesday evening, Biden added climate change, a $15 minimum wage, right to organize, gun control, paycheck fairness, defense spending, charging stations, even a goal to cure cancer.

Biden Has Exceeded Progressive Expectations

Not that any more evidence of Biden’s Progressive slant is needed, but AOC’s praise of Biden is in and of itself all one would need to know that Biden is no moderate.

Please note that Biden has “Exceeded Expectations” that the Progressives had and AOC is pleased with his push.

“The Biden administration and President Biden have definitely exceeded expectations that progressives had,” the New York congresswoman, a star on the left of the Democratic party, told a virtual town hall meeting. “I think a lot of us expected a much more conservative administration.”

Ocasio-Cortez also said Biden had been “very impressive” in his approach to negotiating with Congress, resulting in the passage of “progressive legislation”.

“It’s been good so far,” she said.

Biden’s “American Socialist Plan”

The Guardian published that article on April 24, before details of Biden’s extremely progressive “American Family Socialist Plan” were disclosed.

AOC Pleased With Biden’s “Very Impressive” Effort

Since AOC is pleased, unless you are a flaming Progressive, you likely need a bucket in which to do the obvious.

The saving grace, I hope, is that Biden’s Lofty Economic Plan Will Be Dead on Arrival in the Senate.

The Final April print for UMich sentiment data was expected to improve on the already impressive surge in the preliminary data and it did rising from 86.5 to 88.3 intramonth (up from 84.9 in March) to a new pandemic cycle high. The gauge of expectations picked up in the last part of April, rising to 82.7 from a preliminary reading of 79.7. A reading of current conditions remained unchanged at 97.2 from earlier in the month, according to surveys conducted March 24 to April 26.

Source: Bloomberg

Democrats, Republicans, and Independents all saw sentiment rise for the second straight month…

Oddly, given the handouts’ focus, the lowest-income Americans saw sentiment decline as the wealthiest confidence soared…

“The largest and most important change in the economic outlook in April was that an all-time record number of consumers expected declines in the unemployment rate in the year ahead,” Richard Curtin, director of the survey, said in a report.

“The data indicate an exceptional outlook.”

Finally, and somewhat oddly, consumers reportedly expect inflation to rise 3.4% in the next year, significantly down from the 3.7% preliminary estimate. It is still the highest since 2012.

Which is odd as every price of every asset everywhere has done nothing but rise during the month.

Confirming the same pattern of hope-filled surges in ‘soft’ survey data in the last month, Chicago PMI just exploded higher in April, printing at 72.1 from 66.3 prior (and well above even thhighest analyst estimate).

Under the hood, everything was inflationary:

• Prices paid rose at a faster pace; signaling expansion
• New orders rose at a faster pace; signaling expansion
• Employment rose at a faster pace; signaling expansion
• Inventories fell and the direction reversed; signaling contraction
• Supplier deliveries rose at a slower pace; signaling expansion
• Production rose at a faster pace; signaling expansion
• Order backlogs rose at a faster pace; signaling expansion

And something stunning: the last time the Chicago PMI prices index was this high was in Feb 1980 – that’s when the Fed Funds rate was 22% as Volcker was waging a nuclear war to push inflation down. Now, however, the Fed sees no inflation.

Chicago’s survey data confirms the current surge in ‘hope’…

As the gap between hard economic data and emotionall-driven surveys nears a record high once again.

Following today’s release of the latest Personal Income and Spending data, Wall Street was predictably focused on the changes in these two key series, which showed a jump in personal spending, offset by a record surge in personal income (to be expected in the month when Biden’s latest $1.9 trillion stimmy hit).

But while the change in the headline data was notable, what was far more remarkable was data showing just how increasingly more reliant on the US government the population has become.

We are referring, of course, to Personal Current Transfer payments which are essentially government sourced income such as unemployment benefits, welfare checks, and so on. In March, this number exploded to a mindblowing $8.1 trillion annualized, which was not only double the $4.1 trillion from February, but was also $5 trillion above the pre-Covid trend where transfer receipts were approximately $3.2 trillion.

This means that excluding the $8.1 trillion surge in govt transfers, personal income excluding government handouts would be virtually unchanged from a year ago level at $16TN.

In longer-term context, one can see the creeping impact of government payments, shown in red below.

This, as noted earlier, was due to the latest round of government stimulus checks hitting personal accounts which in turn helped double the savings rate to a whopping 27.6% from 13.6% in February.

Stated simply, what all this means is that the government remains responsible for a third of all income, or 33.8 to be precise!

Putting that number in perspective, in the 1950s and 1960s, transfer payment were around 7%. This number rose in the low teens starting in the mid-1970s (right after the Nixon Shock ended Bretton-Woods and closed the gold window). The number then jumped again after the financial crisis, spiking to the high teens. And now, the coronavirus has officially sent this number to a record 34%!

And that’s how creeping banana republic socialism comes at you: first slowly, then fast.

So for all those who claim that the Fed is now (and has been for the past decade) subsidizing the 1%, that’s true, but with every passing month, the government is also funding the daily life of an ever greater portion of America’s poorest social segments.

Who ends up paying for both?

Why the middle class of course, where the dollar debasement on one side, and the insane debt accumulation on the other, mean that millions of Americans content to work 9-5, pay their taxes, and generally keep their mouth shut as others are burning everything down and tearing down statues, are now doomed.

The “good” news? As we reported last November, the US middle class won’t have to suffer this pain for much longer, because while the US has one one of the highest median incomes in the entire world, with only three countries boasting a higher income, it is who gets to collect this money that is the major problem, because as the chart also shows, with just a 50% share of the population in middle-income households, the US is now in the same category as such “banana republics” as Turkey, China and, drumroll, Russia.

What is just as stunning: according to the OECD, more than half of the countries in question have a more vibrant middle class than the US.

So the next time someone abuses the popular phrase  “they hate us for our [fill in the blank]”, perhaps it’s time to counter that “they” may not “hate” us at all, but rather are making fun of what has slowly but surely become the world’s biggest banana republic?

And as we concluded last year, “it has not Russia, nor China, nor any other enemy, foreign or domestic, to blame… except for one: the Federal Reserve Bank of the United States.”

Authored by Michael Every via Rabobank,

The Normality We Were Promised

Happy Friday! It’s end of the week and the end of the month, and a third of 2021 is now already behind us. Does it feel like the promised return to normality for you yet? Maybe it does for some markets, with US stocks at the latest highest-ever high; and while commodity prices aren’t that high, they are certainly at the highest for many years – and still rising for a variety of reasons. Meanwhile, our global-economy meme factory, like US 10-year yields, is still waiting to see what happens. Let’s just take a brief moment then to look at some less well-covered news stories from around the world, and see what picture they paint.

In Europe, Politico points out the recent ‘Sofagate’ was all about an internal power struggle. It includes a line I wish I had written: “A joke emerged among critics of the Commission president: She was not leading the geopolitical Commission, but the ego-political Commission.” Which is a lot less funny if you are European in a new age of Great Power politics. The European Systemic Risk Board (ESRB) warning: “In a worst-case scenario, the postponed insolvencies would suddenly materialise and trigger a recessionary dynamic, potentially causing further insolvencies…The current low rate of insolvencies would then be similar to the sea retreating before a tsunami.” Yet Finland is still blocking the roll out of the Recovery Fund, which a court has ruled requires a two-thirds not a simple parliamentary majority to pass. However, the Helsinki Times quotes a local economist saying this is unlikely to cause market jitters because “If Finland were to reject it, it’d be difficult to see the package ultimately collapse in Europe. Large countries have already approved it, and it’d be taken forward one way or the other.” Which says a lot about EU internal power – and on the external front, Telecom Italia is apparently going to drop Huawei as a supplier.

In the UK, the “Cash for Curtains” scandal has led Prime Minister Johnston to declare “I love John Lewis” (a middle-class British department store that doesn’t sell GBP58,000 wallpaper); and as Scotland gets ready to vote, in Northern Ireland the Democratic Unionist Party are perhaps about to elect a new leader who believes the world is only 6,000 years old, with even Daily Mail mutterings of what this might also mean for the future of the Union.

In New Zealand, we have the headline ‘China’s communists fund Jacinda Ardern’s Labour Party: What the United States Congress was told’, which states “US lawmakers needed to consider whether New Zealand should be kicked out of the Five Eyes intelligence alliance because of problems at its “political core”. This issue also seems to cut across party lines, as the “bombshell testimony” also saw a former CIA analyst allege “anything on China that was briefed to Bill English was briefed to Mr Yang Jian”, the National MP revealed last year as having trained spies for China.”” Meanwhile, after ordering the RBNZ to include house-price inflation as part of its remit, the Kiwi government is apparently considering introducing both stamp duty, to tax house purchases, and rent controls. One upon a time, it was this kind of interference in markets that would have seen US analysts screaming about New Zealand being ‘pinkos’: not today, of course – although even US President Biden didn’t go as far as rent controls in an annual address to Congress that saw Wall Street bashed and the economic role of the state praised.

In China, we have seen a flurry of laws and regulations: to prevent spying by foreign entities, which covers a wide range of potential offenders; to allow Hong Kong to block the arrival of anyone they see fit, which can technically also be used to block their exit; and a new mainland law making binge eating and food waste illegal. Food vloggers are banned from making and distributing binge-eating videos, with fines of up to CNY100,000 (USD15,450); restaurants can charge diners an extra fee if they leave excessive amounts of food uneaten; food providers that induce consumers into making excessive orders can be fined CNY10,000; and food service operators that waste large amounts of food can be fined up to CNY50,000. Is this about pocket books and culinary etiquette, or food security? China has also just reigned in the fin-tech arms of 13 key firms, including Tencent, ByteDance, JD.com, Meituan, and Didi Chuxing.

We also saw China announce that, contrary to rumours, its population rose in 2020 – but no figures were given. (One person would still be an increase, I suppose.) On which, a PBOC working paper argues that even as the population ages, this does not mean China should run down its savings: rather, it should maintain savings and substitute capital for labour. As the paper states:

“Understand this: without [capital] accumulation, there is no growth. Secondly, we must recognize that consumption is never a source of growth. We must understand that it is easy go from frugality from extravagance, but difficult to go from extravagance to frugality. The high consumption rate of developed economies has historical reasons; once you switch, there’s no going back, so we should not take them as an example to learn from. Thirdly, we should pay attention to investment. We must expand domestic investment in the central and western regions; although China’s marginal return on capital continues to decline, the potential for replacing workers with robots in these regions is still promising. We must expand outward, and especially invest in Asia, Africa, and Latin America, because these regions provide the only remaining large demographic dividend.”

There is *so much* to unpack there on so many fronts – and so little correlation between this view and the straight-line bullish projections one sees elsewhere. At the very least it means our current global imbalances, and geopolitical tensions, will be locked in ahead rather than addressed. And when can we finally drop the “China is shifting to a consumption model” meme?

In the US there is obviously lots of coverage of President Biden’s annual speech, aimed at competing with China via higher public investment; and on the political math of how many of these plans could actually make it through the present Congress ahead of the 2022 mid-terms. And in the background, former President Trump gave a press interview where he strongly suggested he would run again in 2024, and may restart MAGA rallies as soon as next month.

Lastly, The Economist magazine has as its front cover today a map of Taiwan on what is obviously a military radar screen under the title: “The Most Dangerous Place on Earth”.

So there you have it: just a little snapshot of just some events transpiring around the world in the last few hours as one ponders what the rest of 2021 holds. Happy Friday!

A long-awaited legal showdown between Apple and “Fortnite” maker Epic Games will start May 3, when a federal judge will hear arguments as Epic alleges that Apple’s control of the iOS app store, and the fees it charges developers, makes it an illegal monopoly, the EU’s anti-trust czar Margrethe Vestager (who has a reputation for attacking American tech giants on anti-trust grounds) has just launched a similar crusade of her own.

Via a charge sheet issued Friday, Vestager and the EU have determined that Apple is guilty of antitrust violations for allegedly abusing its control of its app store when it comes to music-streaming apps like Spotify, a European company that competes against Apple’s “Apple Music” with its popular music-and-podcast streaming app, and which complained to Vestager about Apple.

While that sounds reasonable at first brush, it’s worth noting the specific practice that Vestager finds offensive: And that’s Apple’s practice of charging commissions as high as 30% on some of its most popular apps. That’s virtually the same issue that Epic and Apple will be battling over.

“By setting strict rules on the App Store that disadvantage competing music streaming services, Apple deprives users of cheaper music streaming choices and distorts competition,” said Margrethe Vestager, who is in charge of competition enforcement at the European Commission.

Fortunately for Apple, the company will have a chance to argue its case before the European Commission hands down a final decision. However, if found guilty, Apple could face a fine of up to 10% of its annual revenue and be forced to adjust its business practices, though it can also appeal any decision in court.

Spotify isn’t the only company complaining to European regulators: Epic Games also lodged an antitrust complaint with the commission against Apple back in February on similar grounds.

“We will not stand idly by and allow Apple to use its platform dominance to control what should be a level digital playing field,” Epic founder and Chief Executive Tim Sweeney said at the time.

The US legal dispute started last summer when Epic sued Apple after Apple removed Fortnite from the App store over Epic’s decision to create an in-app workaround that allowed customers to circumvent Apple’s commissions, despite the company’s explicit threats that it would ban Fortnite if Epic tried to deprive Apple of what the company sees as hard-earned revenue.

The EU formally opened its app store case last year. The bloc is also probing Apple over its treatment of payment providers and app developers in its Apple Pay ecosystem, as well as its imposition of its in-app payments system for competing providers of e-books. The case deepens the EU’s long-running battle with Apple over tax and competition issues, which dates all the way back to when the bloc forced the company to pay back taxes to the Irish government.

As WSJ points out, at the core of the EU case against Apple is a question that is increasingly being asked by antitrust regulators and experts globally: What responsibilities should be placed on companies that serve millions of businesses and billions of consumers with services that many now consider “essential”. 

In December, the EU also proposed a new bill that would impose new requirements on so-called gatekeeper businesses, defined as companies with high earnings and market capitalizations with more than 10,000 active business customers or 45 million active end users in the bloc.

The ramifications of this new law would be felt by Apple, Facebook, Amazon and Google, while few European firms would be impacted.

Authored by Lance Roberts via RealInvestmentAdvice.com,

There has been much commentary suggesting bonds have gotten overvalued due to historically low rates.

“Stocks are expensive, but bonds are enormously overvalued on a long-term basis” – Jeremy Siegel

However, is that the case?

There is no argument stocks are highly overvalued. We spent much of the past week discussing why forward returns will be lower over the next decade.

• Low Future Returns Requires A “Real” Bear Market

• Forward Returns Continue To Fall

The basic premise is that overpaying for earnings today leads to lower rates of return in the future. Of course, given the flood of liquidity from global Central Banks, the overvaluation of markets is of no surprise.

However, while analysts develop various rationalizations to justify high valuations, none hold up under objective scrutiny. While Central Bank interventions boost asset prices in the short-term, there is an inherently negative impact on economic growth in the long term.

However, bonds are a different story.

Bonds Can’t Get Overvalued.

Unlike stocks, bonds have a finite value. At maturity, the principal gets returned to the “lender” along with the final interest payment. Therefore, bond buyers are very aware of the price they pay today for the return they will get tomorrow. As opposed to an equity buyer taking on “investment risk,” a bond buyer is “loaning” money to another entity for a specific period. Therefore, the “interest rate” takes into account several substantial “risks:”

• Default risk

• Rate risk

• Inflation risk

• Opportunity risk

• Economic growth risk

Since the future return of any bond, on the date of purchase, is calculable to the 1/100th of a cent, a bond buyer will not pay a price that yields a negative return in the future. (This assumes a holding period until maturity. One might purchase a negative yield on a trading basis if expectations are benchmark rates will decline further.) 

As noted, since bonds are loans to borrowers, the interest rate of a bond is tied to the prevailing rate environment at the time of issuance. (For this discussion, we are using the 10-year Treasury rate often referred to as the “risk-free” rate.)

However, with existing bonds traded on secondary markets, the price is determined by the difference between the coupon rate and prevailing rates for similar obligations. The benchmark rate acts as the baseline.

A Very Basic Example.

Let’s review an example.

Bond A:

• Current benchmark interest rates = 5%

• A $1000 bond gets issued at 100.00 (par) with a 5% coupon with a 12-month maturity.

• At the end of 12-months, Bond A matures. $1000 gets returned to the lender with $50 in interest, equating to a 5% yield.

For the person who loaned the money, the 5% coupon for 12-months is sufficient to offset various market and economic risks.

Now, let’s assume the benchmark interest rate falls to 4%.

• What is the “fair value” of Bond A in a 4% rate environment?

• Since the fixed coupon is 5%, the price must change adjust the “yield at maturity.”

• In this case, the price of Bond A would rise from $100 to $101.

• At maturity, the principal value of $1000 gets returned along with $50 in interest to the holder.

• However, if the bond was sold at $1010 ($1000 x 101%), there is a loss of $10 in value ($1010 – $1000) at maturity. Such equates to a net return of $1000 +($50 in interest – $10 loss in principal = $40) = $1040 or a 4% yield.

Got it?

The chart below shows the 10-year Treasury yield as compared to BBB to AA Corporate Bond rates. Not surprisingly, as the credit rating declines, the spreads between the “risk-free” rate and the “risk” rate increase. However, except for the bond market freeze during the “financial crisis” and “Covid shutdowns,” the ebb and flow of yields primarily track the “risk-free” benchmark rate.

Since rates are generally tied to a primary benchmark, for bonds to become overvalued, the benchmark rate would have to become detached from the underlying metrics that drive the level of borrowing costs.

Is that the case now?

Rates Are A Function Of The Economy

As I have discussed many times in the past, interest rates are a function of three primary factors: economic growth, wage growth, and inflation. The relationship, shown below, should not be surprising given that, as stated above, the “rate” charged for lending money must account for economic growth and inflation.

Okay, maybe not so clearly. Let me clean this up by combining inflation, wages, and economic growth into a single composite for comparison purposes to the level of the 10-year Treasury rate.

Again, the correlation should be surprising given that lending rates get adjusted to future impacts on capital.

• Equity investors expect that as economic growth and inflationary pressures increase, the value of their invested capital will increase to compensate for higher costs.

• Bond investors have a fixed rate of return. Therefore, the fixed return rate is tied to forward expectations. Otherwise, capital is damaged due to inflation and lost opportunity costs. 

As shown, the correlation between rates and the economic composite suggests that current expectations of sustained economic expansion and rising inflation are overly optimistic. At current rates, economic growth will likely very quickly return to sub-2% growth by 2022.

Longer Views Tell The Same Story

“But Lance, this year, GDP is expected to surge to 6%, so doesn’t that change things?”

The answer is “no.“

The jump in GDP growth in 2021 has several problems attached to it.

1. It is a recovery from deeply depressed levels in 2020, not expanding growth absorbing population growth.

2. The recovery is a reflection of an artificial stimulus that has a minimal effective window before depletion. As such, it has an almost negative multiplier effect economically. 

3. Lastly, given that businesses understand the “bump” of activity is temporary, they are unwilling to make long-term investment commitments requiring a cost-of-capital above longer-term economic growth projections.

As Goldman Sachs recently showed, economic growth will quickly return to 20% growth trends as the “artificial” support fades.

These “bumps” of activity are not uncommon throughout history. However, if we smooth the data using a 5-year average of both the economic composite and rates, the correlation emerges.

As shown, the current 5-year average suggests that rates and growth will continue to run along much lower levels. Such does not foster increased capital investment, strong employment above population growth rates, or increase labor-force participation rates. With a near 90% correlation, economists and analysts will likely be disappointed as growth slows and rates fail to rise. 

Bonds Are Sending A Warning

Currently, investors are exuberant in the financial markets due to the “Moral Hazard” created by the Federal Reserve. However, as stated in “No Way, This Doesn’t End Badly,”

“Such is where fundamentals become extremely important. When, or if, expectations of recovery are disappointed, the market will begin to reprice itself for its intrinsic value. Given that the market is currently trading more than twice the level of underlying economic growth, which is where corporate profits come from, such suggests a significant risk.”

The correlation between the “economic composite” and “rates” currently suggests that the “risk of disappointment” is elevated.

At the peak of nominal economic growth over the last decade, interest rates rose to 3% as GDP temporarily hit 6%. However, what rates predicted is that economic growth would return to its long-term downtrend line. In other words, while the stock market was rising, predicting more robust growth, the bond market was sending out a strong warning. 

Once again, economists predict 6% or better economic growth, yet interest rates are roughly 50% lower than previously. In other words, the bond market is suggesting that economic growth will average between 1.75% and 2% over the next few years.

From our view, rates matter. Given their close tie to economic activity and inflation, we think they will matter a lot.

Are bonds overvalued? No.

But stocks are, and the bond market is ringing alarm bells warning you of the same.

After February’s MoM collapse in income (no stimmies) and drop in spending, analysts expected March’s income and spending data to rebound massively as more government handouts reached the hungry American consumer. Analysts were right as personal income exploded by a record 21.1% MoM (vs 20.3% exp) and personal spending soared 4.2% MoM…

Source: Bloomberg

Totally normal…

Source: Bloomberg

Spending is up 11.0% YoY (and incomes up 4.6% YoY)…

Source: Bloomberg

What the f**k are we going to do when the stimmies stop and we, the people become accountable for our own actions and lives once again? (Rhetorical question, of course).

Finally we note that The Fed’s favorite inflation indicator – the PCE Deflator – rose 2.3% YoY, the highest since July 2018…

But of course, that’s “transitory“.

After loading up to the gills during the 2020 oil crash, Exxon is slowly but surely emerging from the crisis period (which it survived without slashing its dividend unlike so many of its peers) and moments ago the former world’s largest company reported stellar earnings which beat across the board, but more importantly, revealed a surge in cash flow as oil prices have rebounded, allowing Exxon to not only comfortably pay its dividend and capex, but also aggressively pay down debt: the key line from CEO Darren Wood.“Cash flow from operating activities during the quarter fully covered the dividend and capital investments.”

Here are the Q1 highlights which as noted, were solid across the board:

• Revenue $59.2bln (exp. $4.60bln);
• EPS $0.64 (exp. 0.59),
• Capex $3.1bln (exp. 3.33bln, -4bln Y/Y)

The company’s Adjusted net income of $2.76BN (above the $2.55BN expected), was the first profitable quarter for XOM since Q1 2020:

Needless to say, higher commodity prices drove Exxon’s first-quarter profit. Exxon’s average realizations for crude oil rose 42% from the fourth quarter, while natural gas realizations climbed 33%.

As for CapEx, Exxon said it was keeping its capital budget at $16 billion-$19 billion this year, a level that management has said is rock bottom, probably below maintenance levels, adding that “If market conditions continue above the company’s planning basis, additional cash will be used to accelerate deleveraging.”

Some more details on Q1 financials:

• Upstream earnings 2.55bln (exp. 2.62bln)
• Chemical earnings 1.42bln (exp. 970mln)
• Cash flow from operations and asset sales 9.57bln (+50% Y/Y)
• Downstream loss 390mln (exp. loss of 134mln)

Here Bloomberg notes that as with Shell, Exxon enjoyed the strong upswing in the chemical market. The company generated $1.4 billion in adjusted net earnings (total adjusted earnings were $2.7 billion). Exxon said it benefited from “continued strong demand, global shipping constraints, and ongoing supply disruptions, particularly in North America, where the polyethylene and polypropylene markets were affected by severe winter weather in Texas.”

And some more on chemicals, which is benefiting from the current rage in house-building, a trend that should be enough to move the needle even for an oil giant the size of Exxon. As such, BBG notes that “Its chemicals division is being lifted by surging prices for plastics.” The cost of PVC, used in pipes, and polypropylene, which packages consumer goods, reached record levels earlier this year, driven by a combination of strong demand and production outages caused by the winter storm and back-to-back hurricanes last year.

Volumes/production:

• Worldwide Net production of BOE/D: 2.258mln
• Refinery throughput 3.75mln BPD (-7.6% Y/Y)
• Natural gas production (mcfd): 9.173mln (exp. 8.870mln)
• Chemical prime product sales (KT): 6,446 (+3.4% Y/Y)
• Downstream petroleum product sales: 4.88mln BPD (-7.7% Y/Y)

The numbers would have been even stronger had it not been for the freak February Texas freeze: Like Chevron, Exxon reported a hit to earnings from the winter storm that pummeled Texas in February, amounting to nearly $600 million: “the severe weather event reduced first-quarter earnings by nearly $600 million across all businesses from decreased production and lower sales volumes, repair costs, and the net impact of energy purchases and sales. All affected facilities have resumed normal operations.”

And yet, despite the storm-related disruptions, overall refining throughput last quarter was “essentially flat” with the fourth quarter as it managed refinery operations in line with fuel demand and integrated chemical manufacturing needs.

But while the top and bottom line were solid, what matters was the cash flow, and it was stellar, coming in at $6.1 billion (thanks to $9.3BN in cash from operations, more than the $6.3BN estimate) and more than enough to cover the $3.7 billion the oil giant pays in dividends each quarter. That freed up money to pay down debt, and fund a likely (small) increase the capital budget next year.

This was in large part thanks to some of the best operating cash cost reductions in the industry.

The company’s guidance was solid across all sectors: :

Upstream Guidance (via slides see below):

• Lower volumes with seasonal gas demand and higher scheduled maintenance
• UK North Sea sale expected to close near mid-year, subject to regulatory and third-party approvals

Downstream Guidance

• Continuing demand improvement with economic recovery
• Higher planned turnarounds and maintenance

Chemical Guidance

• Continuing tight supply/demand balance with increased industry maintenance
• Higher planned turnarounds and maintenance

Notably, Exxon said in its slide presentation that its Permian drilling and completion costs have declined 40% versus 2020, as have lease operating expenses. Last year’s pandemic has forced price reductions for oil services. In fact, that’s allowed producers to slash CAPEX without cutting too much of their oil production.

Finally, the presentation has several slides dedicated to the hostile proxy fight with Engine No 1 (which bought a few millions XOM shares and thinks it can decide strategy) as well as its much better relationship with that other, and far more respectable activist, DE Shaw.

Full presentation below

Authored by James Rickards via The Daily Reckoning,

What took Wall Street so long to figure out something I’ve been saying for months?

Six months ago, even before the presidential election in November, I began warning my readers that Joe Biden was going to double the capital gains tax.

It wasn’t a difficult prediction. Biden said so himself in his campaign website as one of a long list of policy proposals.

Of course, the mainstream media didn’t report this because they were all-in for Biden and were determined to beat Donald Trump (remember how they covered up the Hunter Biden laptop report?).

The media were careful to cover-up any Biden policies that might prove unpopular with voters. Still, Democratic Party progressives knew about the plan and were all for it.

One Simple Rule

My rule for making policy forecasts is simple. If a politician tells you he’s going to do something, believe him.

Policies don’t drop out of the sky. They’re the result of intense internal debate and compromise by competing factions. Once a policy makes it to a candidate’s website, you can bet they will try to deliver.

This doesn’t mean that every proposal becomes law because there can be opposition in Congress and the courts. However, it does mean the politician will work to achieve his stated goals.

With the White House and both houses of Congress in the Democrat’s hands, the odds of this doubling of the capital gains tax becoming law look very good.

Despite my forecasts (which fortunately left my readers well-prepared), Wall Street didn’t seem to pay attention until last Thursday, when the Dow Jones index plunged 210 points in a matter of hours after the Biden tax plan was formally announced.

That’s a good example of how so-called “efficient markets” are not efficient at all.

Not so Efficient After All

Mainstream economists have insisted for decades that markets are highly efficient, and they do a nearly perfect job of digesting available information and correctly pricing assets today to take account of future events based on that information.

In fact, nothing could be further from the truth. Markets do offer valuable information to analysts, but they are far from efficient.

Markets can be rational or irrational. Markets can be volatile, irrationally exuberant, or in a complete state of panic depending upon the emotions of investors, herd behavior, and the specific array of preferences when a new shock emerges.

If markets were so efficient, why was Wall Street surprised when it was obvious to anyone paying attention that Biden was going to raise the capital gains tax?

The capital gains tax increase information had been there for all to see for six months, but it took a press release to get Wall Street to sit up and take notice.

It should have been priced in long before, and the announcement just would have confirmed market expectations.

So the next time you hear about efficient markets, take it with a large grain of salt.

But my forecast from six months ago was wrong in one respect.

Even Worse Than I Thought

I said the tax rate on capital gains would almost double from 20% to 39.6%. It turns out the rate will actually be 43.4% once a 3.8% investment income surtax is added on top. That surtax is a holdover from Obamacare.

If one were to add state and local income taxes, the combined rate on capital gains could exceed 50%, depending on the jurisdiction.

Of course, capital gains taxes are imposed on investments you make from after-tax dollars, so even the initial investment has already been taxed. And the corporations whose stock you buy pay corporate income tax too.

When those burdens are included, you’re lucky to get even 25% of your gains back net of taxes. This will be a headwind to stock markets for the foreseeable future.

The big question is, is the stock market in a bubble?

A $100 Million Deli?

When I first saw a recent story about a deli in New Jersey that was worth $100 million, I couldn’t believe it.

I assumed the deli must have a big-ticket franchising deal with McDonald’s or Subway to expand to 1,000 locations under the original name brand. That type of deal might justify a sky-high valuation for a one-store operation.

But, no, there was no franchise deal or other licensing deal that might explain the price. It’s just a deli with about $35,000 in annual sales.

As one analyst said, “The pastrami must be amazing.” Does anyone in their right mind think a deli with $35,000 in annual sales could be worth $100 million?

Well, it turns out that the owner of the deli created a company called Hometown International, and its shares trade over-the-counter. Recently, investors have bid up the stock price from $9.25 per share to $14.00 per share, giving the deli company a market capitalization of $113 million.

Hoping For a Greater Fool

But this story is not really about delis or pastrami. It’s about market bubbles and ridiculous valuations that can result when retail investors bid up stocks in the hope that a greater fool will pay them even more when they cash out.

In these situations, the market capitalization becomes completely detached from fundamental value, projected earnings or any other tool used in securities analysis.

It’s just a bubble with inevitable losses for the last buyers. But does that mean you should sell all your stocks now because the bubble will pop any day now?

No, not really. Bubbles can last longer than many believe because there is a continual flood of new buyers who hope that they won’t be the last ones to run for the exits.

The bigger issue is whether this kind of bubble in one stock indicates a broader market indices trend.  The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite are all at or near all-time highs.

But this does not automatically mean the stock market indices are in bubble territory, although, many objective metrics, including the ratio of market cap to GDP and the Shiller CAPE price-earnings ratio, indicate that is the case.

No One Rings a Bell at the Top

Saying that markets are overvalued is not the same as saying they’re ready to crash.

It will take some external shock such as higher interest rates, a geopolitical crisis, or an unexpected bankruptcy of a major company to bring markets back to earth.

We know that such events do occur with some frequency. But, it’s probably not a good idea to short the market, because it could go even higher. That’s the way bubbles work. No one rings a bell at the top. There’s no precise formula to tell you the day they’ll pop.

So, I’m not suggesting that you sell everything and head for the hills. Having said that, it’s a good idea to reduce your exposure to stocks, diversify with cash and gold and just bide your time.

When the crash comes, you’ll be greatly outperforming those who are all-in with stocks – including delis.

Then we’ll see how efficient markets really are.