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Submitted by Eric Peters, CIO Of One River Asset Management

“Wanted to make sure you’re seeing this,” texted a PM from one of those multi-manager monstrosities.

“8 standard deviation move in the Momentum Factor in 5-days,” he added. I heard his heart pounding all the way from Australia.

“Guys who defended positions in the Q4 selloff all got fired, so the message is real clear – when things start getting weird, take immediate corrective action.” And I imagined the quiet panic consuming firms that leverage their capital at multiples that would make a Lehman risk manager blush.

“I’m more convinced than ever that one of these days, this kind of 8 standard deviation event is going to crash the market,” he texted, having puked his position without the slightest idea why the move had even started.

• Factor Definitions (Momentum): Momentum is the empirically observed tendency for rising asset prices to rise further and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month. Momentum signals (e.g., 52-week high) have been shown to be used by analysts in their buy and sell recommendations. The existence of momentum is a market anomaly, which finance theory struggles to explain.
• Factor Definitions (Value): The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier. the best-known work on the value factor was carried out by Fama and French in their 1992 paper (The cross-section of expected stock returns), which concluded that low price-to-book ratio was the most predictive definition of value. To this day, different definitions of value are favored by investors, including cashflows, price relative to earnings, dividend yield, and other company fundamentals.

“There were early adopters,” he said. “Citadel was probably the foremost expert in style factors and for years they were playing the game with few real competitors.” We were discussing the carnage taking place beneath the market’s surface, with many guys losing their year, some losing their jobs – all in a week when the S&P 500 closed +1.0% and the VIX finished at 13.7.

“They leveraged the factor strategies and did very well. But over time their advantage got difficult to sustain. Then their traders scattered. Some started firms to compete.”

“The momentum factor had been on fire for 3-4 months,” he said. By early August it hit levels last seen at the Feb 2016 extreme. “A lot of guys figured it would reverse and fought it. But it kept going, then went into overdrive, it hit insane levels as people capitulated,” he said.

“Then it just reversed for no reason and it was madness-of-crowds time. It was not-everyone-gets-out-of-the-burning-theater-alive time. It was bank-run time. And then the momentum collapse spilled into the value factor. Which took off in the opposite direction.”

“When this kind of liquidation starts, there are two schools of thought,” he said. “There’s the ditch-everything school,” he said, having just ditched. “Then there’s the take-half-off-now-and-pray-it-comes-back school.” That’s where most guys got diplomas.

“But you end up taking off half the next day, then half again, and so on.” That’s what gives liquidations longevity. “Some think Value has underperformed Growth for so long that this unwind goes on for ages. I think it’ll look like 2016 which means it’s 60% over – and this attack on the Saudi refineries is going to wreak havoc on the factor trade Monday morning.”

“Let’s say they give me $500mm capital to trade,” he said. “I buy $500mm worth of stocks and sell $500mm worth, which makes me 1x leveraged,” he explained. “Multiply that leverage across all the equity traders here, then add all the rates traders and you find that the firm overall is 10x leveraged.” For each $1bln of capital, they hold $10bln of positions. The biggest player in the market is leveraged 15x. “When you have that kind of leverage you need to have tight stops. Which we all do. And that’s why when it starts going wrong, you’re out.”

Hong Kong police once again deployed tear gas, rubber bullets and water cannons after protesters defied a government-canceled march organized by the Civil Human Rights Front. 

To prepare for the encounter, protesters dug bricks from pavements, set up barricades at the closed Admiralty MTR Station, and hurled molotov cocktails and other firebombs – hitting a water cannon truck and setting it on fire, according to Reuters and HKFP. 

Protesters also set fire to a banner honoring the 70th anniversary of the founding of the People’s Republic of China, Reuters reports. 

At one point a middle-aged man was beaten on Cloucester Road, according to SCMP: 

To try and slow down the influx of people, Hong Kong’s mass transit railway (MTR) Corporation enacted crowd control measures, including halting certain escalators – something Democratic lawmaker Lam Cheuk-ting told HKFP would be of little help. 

“Of course, the police force try to make use of the MTR system to deploy increased manpower to suppress our movement. But I do not think Hong Kong people will back down and if [police] try to use any excessive power to stop them, they will just spread to other parts of Hong Kong,” said Lam. 

One man wearing a stormtrooper mask climbed on top of a tram and was seen waving an American flag and a light saber while the Star Wars theme blared in the background. 

A black-clad person wearing a storm trooper mask, from the franchise Star Wars, has scaled a tram stop on Des Voeux Road Central, waving a toy light laber and a US flag, to approving cheers from the crowd.

In full: https://t.co/kmLJLFCnSX. #hongkong #hongkongprotests #antiELAB pic.twitter.com/JoqO8lvYNn

— Hong Kong Free Press (@HongKongFP) September 15, 2019

“Even though the police rejected our march today we will still come out because it is our right to do it,” said a 24-year-old registered nurse “Ms Chow,” who says she has joined the protest most weekends. “I think the majority of Hong Kong people are not afraid of coming out.”

According to HKFP, a large banner reading “I want democracy” was unfurled across from the Central Government Offices. 

The months-long protest were sparked by a controversial extradition bill which would allow suspects to be sent to mainland China to face trial. It has since evolved into a general anti-government movement revolving around five demands – “withdraw the extradition bill, retract the categorisation of protests as riots, drop all charges against those involved in the movement, investigate police misconduct, and transition to full democracy,” according to HKFP. And while the extradition bill was withdrawn completely (after first ‘pausing’ it), the protests have shown no signs of slowing down. 

“We’re not satisfied with the withdrawal [of the extradition bill]. It’s too late,” a 40-year-old teacher who wished to remain anonymous told HKFP, so said she considered the cancelation of Sunday’s march to be unacceptable. 

“After three months, she just said those two words – she has been playing these word games. It’s dirty, the whole government is dirty,” added the teacher. 

“It was promised that Hong Kong people would enjoy basic human rights and such protection,” one demonstrator told the BBC, who added “We believe that the UK government has the legal rights and moral obligation to protect Hong Kong people.” 

In the 21st century, few trends have matched the economic, environmental, and societal impact of rapid urbanization.

As Visual Capitalist’s Iman Ghosh notes, a steady stream of human migration out of the countryside, and into swelling metropolitan centers, has shaken up the world’s power dynamic in just decades.

Today’s eye-catching map via Cristina Poiata from Z Creative Labs looks at 70 years of movement and urban population growth in over 1,800 cities worldwide. Where is the action?

Out of the Farms and Into the Cities

The United Nations cites two intertwined reasons for urbanization: an overall population increase that’s unevenly distributed by region, and an upward trend in people flocking to cities.

Since 1950, the world’s urban population has risen almost six-fold, from 751 million to 4.2 billion in 2018. In North America alone, significant urban growth can be observed in the video for Mexico and the East Coast of the United States as this shift takes place.

Over the next few decades, the rural population is expected to plateau and eventually decline, while urban growth will continue to shoot up to six billion people and beyond.

The Biggest Urban Hot-Spots

Urban growth is going to happen all across the board.

Rapidly rising populations in megacities and major cities will be significant contributors, but it’s also worth noting that the number of regional to mid-sized cities (500k to 5 million inhabitants) will swell drastically by 2030, becoming more influential economic hubs in the process.

Interestingly, it’s mainly cities across Asia and Africa — some of which Westerners are largely unfamiliar with — that may soon wield enormous influence on the global stage.

It’s expected that over a third of the projected urban growth between now and 2050 will occur in just three countries: India, China, and Nigeria. By 2050, it is projected that India could add 416 million urban dwellers, China 255 million, and Nigeria 189 million.

Urbanization and its Complications

Rapid urbanization isn’t only linked to an inevitable rise in city populations.

Some megacities are actually experiencing population contractions, in part due to the effects of low fertility rates in Asia and Europe. For example, while the Greater Tokyo area contains almost 38 million people today, it’s expected to shrink starting in 2020.

As rapid urbanization continues to shape the global economy, finding ways to provide the right infrastructure and services in cities will be a crucial problem to solve for communities and organizations around the world. How we deal with these issues — or how we don’t — will set the stage for the next act in the modern economic era.

Setting the stage for what could be one of the biggest industrial disputes in the US in recent yeas, the UAW said on Sunday that its roughly 48,000 hourly workers at General Motors’ plants in the US will go on strike at midnight on Sunday after their contract talks reached an impasse, according to Reuters.

This is the first time GM employees have launched a national strike in 12 years.

“We do not take this lightly,” Terry Dittes, the UAW vice president in charge of the union’s relationship with GM, said at a press conference in downtown Detroit. “This is our last resort.”

On Tuesday, the union’s membership voted overwhelming to authorize the leadership to call a national strike, with 96% of members supporting the action. That’s less than the number who supported negotiations four years ago, when workers at GM and Fiat supported a strike by 97% and 98%, respectively.

In a statement, GM said that its offer to the UAW included $7 billion in new investments, 5,400 jobs (most of which would be new) as well as modest pay increases, improved benefits and a contract ratification bonus of $8,000.

“We have negotiated in good faith and with a sense of urgency,” a rep for GM said.

According to Reuters, the strike could swiftly disrupt GM’s operations across North America and could hurt the broader US economy at a time when the auto industry is already suffering from slumping sales.

GM’s hourly workers will also likely suffer from greatly reduced strike pay. GM workers last went on strike during contract talks in 2007. That strike only last two days, but a more serious strike occurred in Flint, Michigan, in 1998, lasted 54 days and costing the No. 1 US automaker more than $2 billion.

The union has been struggling to stop GM from closing plants in Ohio and Michigan while arguing that workers deserve higher pay after years of record profits.

Though, at the same time, there is an ongoing (and widening) Federal probe into union corruption that resulted in UAW President Gary Jones’ home being searched last week by federal officials (he has not been charged). That investigation has already resulted in convictions of eight union and company officials associated with Fiat.

Charges were also filed against Michael Grimes, a former UAW official who was assigned to GM’s department and who allegedly took $2 million in kickbacks from UAW vendors.

GM insists that it needs to shutter the plants for economic reasons, and that UAW wages and benefits are too high to compete with non-union auto plants in the south.

In its statement, the automaker said its offer to the union included “solutions” for the Michigan and Ohio assembly plants. One source told Reuters that this could include production of a future electric vehicle. The company’s shuttered plant in Lordstown could become a plant for electric batteries.

The UAW has been building up reserves in preparation for a possible strike, but still, its strike pay for workers affected by the strike is just $250 per week, much less than their standard wages.

The longer the strike lasts, the harder it will be for GM’s workers, who will soon struggle to pay their bills on what amounts to a salary of roughly $12,000 a year.

“The pain is deep on both sides,” said Kristin Dziczek, vice president of industry, labor and economics at the Ann Arbor, Michigan-based Center for Automotive Research. “(GM) will start to see costs immediately, but the costs (will) become prohibitive and drive them back to the table after a couple of weeks.”

“That’s going to have a big effect on the economy,” she said.

The automaker has 12 vehicle assembly plants, 12 engine and power train facilities and a handful of other U.S. stamping plants and other facilities.

It’s not clear whether talks have resumed, but earlier on Sunday, the UAW said 850 maintenance workers employed by GM contractor Aramark went on strike at five plants in Michigan and Ohio.

Now that Goldman has successfully sparked a near-frenzy of chaos, confusion (and market buy orders) ahead of tonight’s trading open, the only question is how high will oil surge. And according to some preliminary estimates, oil analysts expect crude prices to jump at least $5 to $10 a barrel at 6pm on Sunday after some 5% of world oil supply was pulled off the market after a drone strike hit a critical Saudi oil facility.

Saudi Aramco lost about 5.7 million barrels per day of output after several unmanned aerial vehicles on Saturday struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais. And with Saudi Arabia admitting that it could take weeks to restore full production, Bloomberg reports that the Trump administration is ready to deploy the nation’s emergency oil reserves and help stabilize markets if needed.

While oil slumped 3% last week, dropping amid expectations of an Iran detente following John Bolton’s departure, expect a violent reversal when trading reopens tonight.

“This is a historically large disruption on critical oil infrastructure and these events represent a sharp escalation in threats to global supply with risks of further attacks”, wrote Goldman chief commodity strategist Damien Courvalin. “These events are therefore set to support oil prices at their open on Sunday, especially given recent growth concerns and low levels of positioning. The magnitude of such a price rally is difficult to estimate in the absence of official comments on the timeline and scale of production losses.”

Still, one can try to make some educated estimates of what happens next, with consensus gravitating to a $5-10 spike in kneejerk response. The only reason why traders don’t expect a higher spike is because Saudi Arabia has millions of barrels stored in locations around the world, which they can draw down to replace the lost production. A rally could also be tempered if the U.S. and other countries release oil from their strategic reserves to ease the shortfall, according to Bloomberg.

Here are the expectations by several analysts, compiled by Bloomberg:

• “We can expect oil prices to be $5/bbl higher when it opens,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “The events over the weekend show the vulnerability of oil facilities in the Mideast.”
• ClearView Energy Partners LLC sees potential for prices to rise $10 a barrel, assuming a three-week shutdown, according to a note to clients. If damage turns out to be extensive and the outage is extended, they expect a loosening of OPEC+ supplies and a coordinated release of strategic reserves from the U.S. and elsewhere.
• “Brent could go to $80 tomorrow, while WTI could go to $75,” said Sandy Fielden, director of research for Morningstar Inc. “But that would depend on Aramco’s 48-hour update. The supply problem won’t be clear right away since the Saudis can still deliver from inventory.”

• “The initial move higher will depend on the strength of short-covering,” Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said by email. “We finished last week on a weak note after monthly oil market reports pointed to a prolonged supply glut.”
• “Brent should regain much of the premium lost to West Texas Intermediate over the past few months. Rapidly increasing U.S. supply, the likelihood of releasing crude from the Strategic Petroleum Reserve and potential for a ban on exports should provide a greater boost to the benchmark”, according to Bloomberg commodity analyst Mark McGlone

Separately, while we shared a Goldman sales email earlier – one whose general tone was bordering on panic and chaos – a separate research note published by Goldman commodity strategist Damien Courvalin, lays out four possible shhutdown scenarios, and the price oil could hit for each:

• A very short outage – a week for example – would likely drive long-dated prices higher to reflect a growing risk premium, although short of what occurred last fall given a debottlenecked Permian shale basin, a weaker growth outlook and prospects of strong non-OPEC production growth in 2020. Such a price impact could likely be of $3-5/bbl.
• An outage at current levels of two to six weeks would, in addition to this move in long-dated prices, see a steepening of the Brent forward curve (2-mo vs. 3-year forward) of $2 to $9/bbl respectively. All in, the expected price move would be between $5 and $14/bbl, commensurate to the length of the outage (a six month outage of 1 mb/d would be similar to a six week one at current levels).
• Should the current level of outage be announced to last for more than six weeks, we expect Brent prices to quickly rally above $75/bbl, a level at which we believe an SPR release would likely be implemented, large enough to balance such a deficit for several months and cap prices at such levels.
• An extreme net outage of a 4 mb/d for more than three months would likely bring prices above $75/bbl to trigger both large shale supply and demand responses.

For those asking at what price the US may release oil from the SPR, here is a Goldman sensitivity table laying out what price levels (shaded) are likely to spark SPR drawdowns.

That said, now that the US is a net petroleum exporter, the SPR has – according to Goldman – become redundant and could be drawn down extensively.

Courvalin lists a few final price/production considerations: From a crude quality perspective, replacement OPEC+ (Russia, Kuwait, UAE) and US SPR barrels are of similar API and sulfur content as the potential disrupted Saudi production (Ghawar, Khurais).

Even so, heavy, high-sulfur crudes will also likely be in demand due to the type of oil that was taken off the market:
Andy Lipow on Dubai: “I would expect sour crude differentials to get stronger given the Saudis exports are heavier and have higher sulfur crudes.” Should the disruption lead to a deficit, this would nonetheless reduce global medium sour crude supplies and tighten the Brent-Dubai spread.

Separately, any large rally in deferred prices next week would represent an opportunity for producers to hedge their expected production for 2020 and 2021 (where coverage remains very low). Ironically, higher US shale oil production on the back of a sustained rally in prices would further create downside risk to US gas prices, with higher associated gas production in the face of limited demand growth in coming years requiring even lower Appalachia and Haynesville gas production. In other words, a surge in gas prices tomorrow, offset by tumbling gas prices 1-2 years from now…. just in time for president Elizabeth Warren to end all US shale production.

Last September, less than two weeks before Judge Brett Kavanaugh would be confirmed to the Supreme Court, a second woman accused him of sexual misconduct during the 1983 – 1984 academic year – claiming Kavanugh waved his penis in her face during a drunken dormitory party and “caused her to touch it without her consent as she pushed him away.” 

Specifically, accuser Deborah Ramirez told the New Yorker‘s Ronan Farrow that she remembered “a penis being in front of my face,” and that despite being inebriated, someone encouraging her to “kiss it.” 

Despite acknowledging “significant gaps in her memories of the evening” due to being incredibly drunk, Ramirez then recalls someone yelling down a hallway “Brett Kavanaugh just put his penis in Debbie’s face!”

In response, Kavanaugh said last September: “This alleged event from 35 years ago did not happen. The people who knew me then know that this did not happen, and have said so. This is a smear, plain and simple. I look forward to testifying on Thursday about the truth, and defending my good name—and the reputation for character and integrity I have spent a lifetime building—against these last-minute allegations.”

And when asked about it during his confirmation hearings, Kavanaugh said that if there were any truth to the allegations, they would have been “the talk of campus.” 

After making that statement, the New York Times‘ Robin Pogrebin and Kate Kelly spent the next 12 months hard at work piecing together accounts of Kavanaugh’s alleged Yale dick wavings. 

Per The Federalist‘s Mollie Hemmingway, however, Porgrebin and Kelly’s report contradicts their own previous work on the topic.

Ah… I couldn’t figure out why the NYT ran it as commentary/analysis and not A1 news. This makes more sense. https://t.co/GPiqPBx6ob

— John Noonan (@noonanjo) September 15, 2019

According to their report, “At least seven people, including Ms. Ramirez’s mother, heard about the Yale incident long before Mr. Kavanaugh was a federal judge. Two of those people were classmates who learned of it just days after the party occurred, suggesting that it was discussed among students at the time.” 

What’s more, the duo also “uncovered a previously unreported story about Mr. Kavanaugh in his freshman year that echoes Ms. Ramirez’s allegation” in which Kavanaugh’s penis was thrust into a woman’s hand by onlookers. 

A classmate, Max Stier, saw Mr. Kavanaugh with his pants down at a different drunken dorm party, where friends pushed his penis into the hand of a female student. Mr. Stier, who runs a nonprofit organization in Washington, notified senators and the F.B.I. about this account, but the F.B.I. did not investigate and Mr. Stier has declined to discuss it publicly. (We corroborated the story with two officials who have communicated with Mr. Stier.) –New York Times

Kavanaugh has denied Ramirez’s allegations and would not talk to the Times about the new allegation. President Trump, meanwhile, isn’t buying any of it. 

Can’t let Brett Kavanaugh give Radical Left Democrat (Liberal Plus) Opinions based on threats of Impeaching him over made up stories (sound familiar?), false allegations, and lies. This is the game they play. Fake and Corrupt News is working overtime! #ProtectKavanaugh

— Donald J. Trump (@realDonaldTrump) September 15, 2019

The rest of the Times report revolves around Kavanaugh being a rich white kid, while Ramirez – who “grew up in a split-level ranch house in working-class Shelton, Conn.” was a trailblazing female minority who says his penis ended up in her face. You can read the rest here if so inclined. 

Authored by David Kemmerer via CoinTelegraph.com,

Over the past month, we have seen the IRS, the tax collecting agency of the United States, send out more than 10,000 warning and action letters to suspected cryptocurrency holders and traders who may have misreported digital assets on their tax returns. Letters like the 6174-A, 6173 and CP2000 have appeared in the mailboxes of cryptocurrency traders throughout the country, and the crypto tax software company that I run has seen an influx of frantic customers coming to us for tax help out of fear of penalties.

image courtesy of CoinTelegraph

The problem here is that the IRS doesn’t have all of the necessary information. In fact, not only does it not have all the information, but the information that it does have on the cryptocurrency holders that it is sending letters to is extremely misleading. This information, which was supplied to the IRS by cryptocurrency exchanges like Coinbase, is causing the agency to blindly and oftentimes inaccurately come after cryptocurrency traders.

Allow me to break this down further.

How is cryptocurrency taxed in the U.S.?

In many countries around the world — the U.S. included — cryptocurrencies like Bitcoin are treated as property from a tax perspective, rather than as a currency. Just like other forms of property — stocks, bonds, real-estate — you incur capital gains and capital losses that need to be reported on your tax return whenever you sell, trade or otherwise dispose of your cryptocurrency.

Pretty straightforward: If you make a bunch of money investing in Bitcoin (BTC), you have a capital gain and a tax liability that needs to be reported. If you lose a bunch of money, you have a capital loss, which will actually save you money on your tax bill — though it still needs to be reported.

It doesn’t come as a huge surprise that many enthusiasts have not been paying taxes on their cryptocurrency activity. Because of this, it actually makes a lot of sense why the IRS has started carrying out these enforcement campaigns. However, the agency is using information that is extremely misleading, and it is leading to problems. This misleading information starts with Form 1099-K.

Breaking down Form 1099-K

Cryptocurrency exchanges like Coinbase, Gemini and others issue 1099-K’s to users who meet certain thresholds of transaction volume on their platforms. The IRS states on its website that the 1099-K is an information return used to report third-party network transactions to improve voluntary tax compliance.

In plain English, the 1099-K is used to report your gross transactions on a third-party network — in this case, a cryptocurrency exchange. This means that all of your transactions, buys, sells, transfers, etc. are summed up and reported on a 1099-K. If you meet certain thresholds — gross payments that exceed $20,000 and more than 200 such transactions — you and the IRS are both sent a copy of this 1099-K from the cryptocurrency exchange. The IRS is using these documents to monitor who is and isn’t paying taxes correctly.

These “gross transaction” reports can quickly get extremely large for high volume cryptocurrency traders. Remember, every transaction you made  is being summed together on this form. I purchased $1,000 worth of Bitcoin, and then traded that Bitcoin in and out for Ether (ETH) five times, and my gross proceeds are now over $6,000 — even though I only ever “put in” $1,000 cash! This is because all “buy” transactions are added together to report gross proceeds, and in this case, I technically had six different buy transactions and six different “sell” transactions — a Bitcoin trade into ETH is considered both a buy of ETH and a sell of BTC. 

You can see how this number can become extremely large for a high volume trader. At CryptoTrader.Tax, we’ve seen 1099-K’s from customers in the millions of dollars range when the trader only ever had a few thousand dollars worth of crypto.

Why this is so problematic

1099-K’s are reporting gross transaction amounts and are being sent to the government. Yet, the numbers reported are completely irrelevant when it comes to tax reporting, as you are only actually taxed on your capital gains and losses.

Again as an example, say you purchased $10,000 worth of Bitcoin in April and then sold it two months later for $9,500. You have a $500 capital loss that would be deducted from your taxable income. However, reported on 1099-K, nothing is said of your net loss; the form only tells the government that you have $19,500 of gross cryptocurrency transactions. 

Ultimately, 1099-K is not a form that should be used for tax reporting purposes, yet the IRS is relying on it for enforcement. Many people often mistake the 1099-K that they receive from cryptocurrency exchanges with the typical 1099-B that they might receive from their stock broker or other investment platform outside of crypto. The 1099-B is the correct form that reports all necessary information required to calculate and accurately report capital gains and losses — including cost basis and fair market value of your investments. It’s very easy to determine your total capital gain and loss with this form, contrary to 1099-K.

The fact that the IRS is relying on 1099-K to issue action letters is problematic. Unfortunately, cryptocurrency exchanges do not have the ability to give you an accurate Form 1099-B.

Why cryptocurrency exchanges can’t provide tax reports like a stock brokerage does

Because cryptocurrency users are constantly transferring crypto into and out of their exchanges, the exchange itself has no way of knowing how, when, where or at what cost (cost basis) you originally acquired your cryptocurrencies. It only sees that they appear in your wallet on their platform. 

The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis and fair market value of your cryptocurrencies, both of which are mandatory components for tax reporting. In other words, cryptocurrency exchanges do not have the ability to provide you with the necessary information to calculate your capital gains and losses. This also means that they also don’t have the ability to provide you with a 1099-B.

Coinbase itself explains to its users in its FAQs that their generated tax reports won’t be accurate if any of the following scenarios took place:

• You bought or sold digital assets on another exchange.

• You sent or received digital assets from a non-Coinbase wallet.

• You sent or received digital assets from another exchange, including Coinbase Pro.

• You stored digital assets on an external storage device.

• You participated in an initial coin offering.

• You previously used a method other than ”first in, first out“ to determine your gains/losses on digital asset investments

These scenarios affect millions of users.

In conclusion

The information that the IRS is receiving from cryptocurrency exchanges does not reflect your capital gains and losses whatsoever. This is problematic because these capital gains and losses are what you actually pay taxes on, not gross transaction amounts.

So, if you received a warning letter from the IRS, don’t panic. As long as you have been properly filing your cryptocurrency gains and losses on your taxes, you should be fine. The absurdly high numbers that you are seeing on these letters are often times irrelevant. Nonetheless, it is a good idea to consult a tax professional who is familiar with cryptocurrency for further help and clarification — especially if it’s an action letter.

Exactly 11 years to the day since traders organized an emergency impromptu CDS unwind session on Sunday afternoon ahead of Lehman’s shocking September 15, 2008 bankruptcy filing, major banks are preparing for similar Sunday chaos, only this time in the crude oil market in the aftermath of Saturday’s shocking drone attack on the most important oil processing plant in Saudi Arabia (and the world) which may result in a production shortfall of millions of bpd that stretches for days if not weeks, and lead to an explosion in oil prices (for those who are reading this early on Sunday afternoon, gas up your car now before gasoline prices surge on Monday).

First, we present the email that was just sent out by Saxo’s Christopher Dembik, indicating that when Brent reopens, it will surge as much as $5-10 in the Asian session:

Very short comment on what is happening in the oil market.

Following the events in Saudi Arabia, well-informed market participants expect that oil prices may increase by $5-10 per barrel in the Asian session.

Higher pressure on CNY, but also negative for TRY and INR due to elevated current account deficits.

Too early to assess the exact macro impact by it is bright clear we don’t need an oil shock…

The bottom line: oil may spike much more if the return to normal production takes longer than expected. Sure enough, that is the main point conveyed in an email that was just blasted out by Goldman sales (not research) to the bank’s top clients around the globe, with a message is simple: expect chaos when oil reopens… and sharply higher prices.

A shocking lack of additional information has been released since the initial headlines yesterday afternoon that attacks on Saudi infrastructure would halt nearly half of Saudi output.  With even Donald Trump quiet on the issue there remains more questions than answers.

A thorough summary of events and quick market backdrop from my colleague, Elise Backman, is attached.  The long and short of it being that the Saudi’s Abqaiq facility processes up to 7mbd of crude and Khurais that was also hit produces about 1.5 mbd. It’s not an overstatement to call Abqaiq and its surrounding areas the heart of Aramco’s empire. In our view, the flaring pictures from NASA satellites make it very likely that some production is down; these flares are likely not from the attacks but more from the facilities going into emergency shutdowns.  Aramco is built and setup with a lot of redundancies which is why you rarely hear of major outages – given the importance of Abqaiq we expect these redundancies (extra piping, spare stabilization units, extra tanks, etc.) to be even more prevalent at the facility.

 

 

However, this is a meaningful change for the crude market and highlights the vulnerability of Saudi infrastructure, and ongoing instability of the Middle East.  While the market needs more information in order to make a determination on the direct impact to balances our expectation is for the market to trade definitively stronger with high levels of activity from the discretionary, systematic and corporate community likely creating a raft of opportunities.

Expect chaos to begin at 6pm sharp, when futures reopen:

We will be staffed globally from Market Open this evening (6pm EST/11pm BST) with best efforts on pricing subject to market tradability.

And just to help traders make an informed decision (to submit a market buy order), here is what Goldman’s energy analyst, Damien Courvalin and teams, published on the situation moments ago:

Attacks on Saudi oil assets to support prices; magnitude uncertain but likely capped. High level summary from research is below.  We expect estimates to be updated as new information becomes available.

Research Bottom Line:

Two oil facilities in Saudi Arabia were targeted on Saturday by drone attacks, with the extent of the damage highly uncertain yet potentially significant: half of current production was halted while reports indicate that a re-start of most oil output could occur in days or weeks. The potential for a prompt resumption of production hinges on the fact that most damage occurred at a processing plant rather than a field.

This is nonetheless a historically large disruption on critical oil infrastructure and these events represent a sharp escalation in threats to global supply with risks of further attacks. These events are therefore set to support oil prices at their open on Sunday, especially given recent growth concerns and low levels of positioning. The magnitude of such a price rally is difficult to estimate in the absence of official comments on the timeline and scale of production losses. We nonetheless provide a rough first estimate of possible outcomes based on our pricing framework and the experiences of the 2018 Iranian sanctions and the 2011 Libya production losses:

• A very short outage – a week for example – would likely drive long-dated prices higher to reflect a growing risk premium, although short of what occurred last fall given a debottlenecked Permian shale basin, a weaker growth outlook and prospects of strong non-OPEC production growth in 2020. Such a price impact could likely be of $3-5/bbl.
• An outage at current levels of two to six weeks would, in addition to this move in long-dated prices, see a steepening of the Brent forward curve (2-mo vs. 3-year forward) of $2 to $9/bbl respectively. All in, the expected price move would be between $5 and $14/bbl, commensurate to the length of the outage (a six month outage of 1 mb/d would be similar to a six week one at current levels).
• Should the current level of outage be announced to last for more than six weeks, we expect Brent prices to quickly rally above $75/bbl, a level at which we believe an SPR release would likely be implemented, large enough to balance such a deficit for several months and cap prices at such levels.
• An extreme net outage of a 4 mb/d for more than three months would likely bring prices above $75/bbl to trigger both large shale supply and demand responses.

Finally, here is a recap of events that took place over the past 36 hours from Goldman’s sales team:

Following on overnight events / earlier WSJ article, please find additional color from the desk below. Note, we will have desk coverage starting at 6pm EST on Sunday.

Summary of events:

• Saudi Arabia has shut down approximately half (5 mb/d) of its oil output after coordinated drone strikes have hit Saudi oil processing facilities at Abqaiq (7 mb/d capacity) and Khurais (approximately 1.5 mb/d production capacity of Arabian Light). This facility is about 70 km from Dhahran, the headquarters of Aramco, and 328 km to Riyadh. (https://www.cnbc.com/2019/09/14/saudi-arabia-is-shutting-down-half-of-i…)
• Houthi rebels have taken responsibility for the attack and stated that it occurred through firing 10 drones. Official Iranian representatives have remained silent, and Saudi coalition leadership said investigations are underway to identify the perpetrators. News outlets have flagged that some of the missiles that crash-landed (i.e. did not strike their targets) were linked to “IRGC proxies.” (https://www.cnn.com/2019/09/14/middleeast/yemen-houthi-rebels-drone-att…)
• Israeli representatives have also remained quiet (note: Israeli election is on Tuesday – https://www.nytimes.com/news-event/israel-elections-2019).
• US has yet to officially respond but Secretary Pompeo tweeted “Iran behind nearly 100 attacks on Saudi Arabia, says “no evidence” drone attacks on oil facilities in Saudi Arabia came from Yemen” and called for Iran to be “held accountable” (https://www.wsj.com/articles/drone-strikes-spark-fires-at-saudi-oil-fac…)
• Given the importance of Abqaiq in Aramco infrastructure, it has been a target of several prior Houthi attacked but prior to these events was unaffected in recent years. (https://www.aljazeera.com/news/2019/09/timeline-houthis-drone-missile-a…)
• Saudi has noted that exports will be unaffected by production shut-off (drawing on existing commercial inventories) and also stated that production would renormalize by Monday. Saudi crude stocks are currently at 76 mb (near the highs of the year of 78 mb – chart below of closing stocks per JODI). – https://www.wsj.com/articles/saudi-officials-say-oil-production-to-retu…
• IEA is monitoring the situation in Saudi and says commercial stocks will enable market to be well-supplied. (https://www.reuters.com/article/saudi-aramco-iea/iea-says-oil-markets-w…)

Quick market recap:

• As of Friday’s close, Nov BRT settled $60.22. 1m ATM BRT vols were around 31.3%. Call skew was around -1.8v in 1m BRT. This is about 10 vols lower than the 6m high and 4.8v lower for skew in the same time-frame.
• As of last Tuesday, investors had added about 124k contracts WoW across the oil complex (51.6k in BRT alone) – however, the complex is still down 420k contracts YoY and -150k contracts in BRT net length.
• There is about 13k on $65 Call strike in BRT, 12k OI on $70 strike, and 17k OI on $75 strike (Nov options expire 25Sep).

Key questions from here:

• Please note there has been significant speculation as to the party/parties responsible for the attacks with no official conclusion or statement yet made.
• Will Saudi actually be able to return production by Monday / what is the extent of the damage at relevant fields, oil processing facilities (is there any permanent damage)?
• Will there be future attacks on key elements of Aramco infrastructure?
• Will Saudis respond / how?
• Was Iran involved in the attack, if so how (i.e. IRGC acting independently from official government action?)
• How does this affect Trump Administration’s stance on potentially softening Iranian sanctions – particularly given the domestic political implications of higher oil prices heading into the general election / recent headlines around NSA Bolton leaving the Administration (https://www.aljazeera.com/news/2019/09/bolton-fired-disagreeing-trump-i…)?

Relevant charts (Sources are GS Securities Internal unless otherwise stated. Past performance not indicative of future results).

Authored by Sven Henrich via NorthmanTrader.com,

This week’s renewed move above 3,000 on $SPX prompted victory laps by bulls as the multiple expansion program inspired by central bank intervention and trade optimism once again dominated the market action. Whether these victory laps were justified or were rather pre-mature remains to be seen. From my perch bulls are playing with fire as stock market capitalization to GDP once again exceeded 144% by Friday’s close making markets accident-prone to unexpected events.

The unexpected weekend event of one of Saudi Arabia’s key oil production facilities getting hit by a drone attack shutting down a significant portion of its oil production being a possible example.

Hope is that any production shutdown will be fixed in short order and whatever happens in the next few days in oil markets will not have a lasting impact. That may well be the case, but the event imposes a new element of political uncertainty onto a fragile global economic backdrop that can ill afford any accidents or mistakes.

Bulls are counting on central banks to fix everything again as in 2012 or in 2016. Continued efficacy of central bank intervention at this stage of the business cycle is indeed key to everything and an open question. So far central banks indeed look to retain control as equity prices once again appear well protected from any slowdowns in economic growth and earnings. I remain of the variant view that all these efforts are an expression of policy failure and that these desperate efforts will eventually fail miserably.

My perspective on the recent rally: Four main factors.

1. Central bank meetings.

Keeping it in its simplest form the rally can be viewed as a simple front run into the big central bank meeting in September. The ECB was expected to cut rates and re-introduce QE and hence $DAX rallied for 3 weeks straight right into resistance back testing its broken wedge:

And of course US stocks rallied right into the US Fed meeting scheduled for this coming week as well. Two big central banks offering intervention is a carrot hard to resist for bulls. And as most Fed meetings are viewed as positive triggers for market gains this rally was simply a front run on the expectation of easy money greatly aided by additional factors:

2, Bond reversal.

Bonds were historically overbought and we saw a technical reaction off of the most overbought weekly bond RSI readings in history:

Is it a long term bottom in yields or simply a corrective move before heading to lower yields eventually? We’ll get a sense of this when $TLT hits some basic technical retrace levels, the .382 fib being one of these potential pivot points. Note that fib now shows confluence with the 2016 high of $TLT, if it now proves support $TLT may bounce off of there and resume its ferocious uptrend. A key chart to be watched for sure.

Banks and small caps of course benefited from this reversal in bonds and put in fierce rallies as a result:

None have broken out of their respective ranges, but have clearly put in a chink in the bear argument, that of lack of broader market participation. The recent rotation out of growth momentum into value could be viewed as shift in the market structure, but one which could have lasting consequences as big cap stocks have dominated the landscape for so long and hence the short term relief may turn into long term pain as the market’s valuation equation is so closely intertwined with extreme market cap concentration just a few stocks.

But note on the $RUT chart a structural pattern on its underlying volatility index. It’s a key indicator to watch which brings me to the 2nd factor in this rally:

3. Volatility compression.

This coming week is September OpEx (quad witching) and also expiry of the monthly $VIX futures contract, and volatility compression into the monthly expiration has been a regular part of the market structure:

And this month has been no different, yet $VIX retains its pattern of higher lows in 2019 and could well be on the ascent again following this pattern of compression. The first test of this will come on Monday following the drone attack on the Saudi oil production facility.

The timing couldn’t be more interesting, after all it could be argues that the recent rally simply backtested the broken 2019 trend while compressing $VIX to the bottom range of its flag pattern:

Ironically this backtest has an eerie similarity to the fall of the 2018 when $NDX did precisely the same thing, backtesting its broken wedge then:

What was then a cause for victory laps turned into a valley of tears as this backtest marked the top for 2018.

Note also the repeat pattern of wedges that ultimately fail and this rally here is no different which bring us to the final factor behind the rally:

4. Trade Optimism.

We’ve seen a multitude of trade optimism inspired rallies this past year and a half, any sign of easing of tensions and markets rally. How worried are markets about trade tensions at this point? With $SPX near all time highs I submit not very, but they should, because there is likely not to be a trade deal of size or consequence. It is no accident that the idea of an interim trade deal was trial ballooned this week. Why? Because they know they can’t agree on the big issues:

Translated: we can’t resolve the big issues, there won’t be a deal, but we will tone it down with some non deal for the optics, both sides can declare victory and then I can focus on 2020.
It’s a cave. https://t.co/y3tsRmFnZ0

— Sven Henrich (@NorthmanTrader) September 13, 2019

And will an interim trade deal be enough to cause companies to re-invest? Doubtful. It may be enough to inspire a year end rally, but it will not be enough to address any of the major issues and likely disappoint many of the supporters for the trade war in the first place.

But because the rally was again headline driven and not substance based we again see a rising wedge and many open gaps below on the charts:

Not only do we see many open gaps note last week’s rally stopped precisely at the 3020 gap left open in July on the heels of the Trump tariff tweet.

Gap filled, and now many open gaps below. And I mean many open gaps:

September 2019. A Fed meeting on September 18 expected to cut rates and declaring little to no recession risk and a president calling for zero rates or lower and the re-launching of QE.

Irony is like the gin in the campari, the cream in the coffee Christoper Hitchens once opined and one can’t help but be impressed of the irony of history aligning here.

For not only was it a September 18 when the Fed was going through the same motions as it is now:

September 18, 2007. Fed cuts rates by 50bp from 525bp to 475bp$SPX peaks 3 weeks later on October 11, 2007 not bottoming until March 6, 2009 at 666.79.

Next week FOMC announces their next decision on September 18, 2019.

— Sven Henrich (@NorthmanTrader) September 13, 2019

…but it was also a September when a certain someone called the Fed’s intervention efforts a form of manipulation intended on creating artificial numbers for short term gains:

Today 7 years ago. https://t.co/zxCmAfBc5O

— Sven Henrich (@NorthmanTrader) September 14, 2019

Oh yes irony, the creme in the coffee.

But that’s not all: In 2007 the September rate cut produced a rally that lasted 3 weeks before it was all over. The irony for me? It was the early October time frame that I suggested as a potential point of technical combustion back in April with this chart:

Bottomline: From my perch bulls have been and continue to play with fire and can’t afford a single misstep.  The winds of intervention via central banks remain in bull’s favor as does the continued efficacy of “trade optimism” jawboning. As long as this remains the case rallies can continue to push the wall of valuation toward unprecedented territory, but resistance remains (measured move), multiples keep expanding and earnings growth continues to decline.

The housing market recently saw little incremental growth from recent record low yields. Will it now benefit from rising yields? Doubtful. Ex auto sales recent retail sales were flat year over year. As auto loan interest rates and credit card interest rates are at cycle highs monthly payments will increasingly impact consumer monthly budgets. A sudden jump in gas prices would likely not help matters.

At 144% market cap to GDP US markets remains priced to perfection in an increasingly imperfect world. No bull market without central bank intervention. That has been the game for 10 years. In 2001 and 2007 that was not enough. No bull market even with central bank intervention.

And hence the Fed’s action this week absolutely must produce new highs on markets this week. If they don’t Powell and crew will stare at a 2nd failed break above 3,000 following its 2nd rate cut action in this cycle. And then what are we looking at ? A double top? No bull market despite repeated central bank intervention? And now a Fed with even less ammunition than before and nothing to show for?

As I said: Playing with fire. Sustained new highs are imperative here or this all looks like a failed backtest on the charts and recent compressed volatility could come back with a vengeance and bull victory laps will turn into a valley of tears. But there’s always a silver lining in bad news. Will the new geopolitical uncertainty be a cause for the Fed to suddenly cut by 50bp? We will know more on Wednesday.

*  *  *

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With the Saudis now racing to restore full oil production to normal levels as one Sunday morning headline noted, the industry is bracing for a potential significant delay in production — given rumors the fires at the facilities struck in the early hours of Saturday may not be fully “under control” as the kingdom was quick to assure hours after the raging explosions — which could translate into oil prices being very high for a long time. Industry sources said it could take weeks to return full production levels to normal.

Following what Yemen’s Houthis claimed was their own successful targeting of Saudi Arabia’s second largest oil field in the Khurais, as well as the sprawling Abqaiq oil processing facility in Buqyaq — described by Aramco as “the largest crude oil stabilization plant in the world” — the Saudi company acknowledged it was forced to slash its output by half, equal to about 5% of world supply, specifically 5.7 million barrels a day of oil production lost. In the meantime, Saudi Arabia’s stock market fell by 2.3% at Sunday’s open.

What will Monday bring? Upon market opening there’s widespread prediction oil will rally by $5 to $10 per barrel, and as we were among the first to note, could eventually hit $100 per barrel — the latter alarming scenario dependent on how slow or fast the facilities can be brought back online.

As Bloomberg detailed, citing insiders familiar with Aramco operations:

Aramco would need weeks to restore full production capacity to a normal level, according to people familiar with the matter. The producer however can restore significant volume of oil production within days, they said. Aramco could consider declaring force majeure on some international shipments if the resumption of full capacity at Abqaiq takes weeks, they said.

Aramco’s president and CEO Amin Nasser announced Sunday, “Work is underway to restore production and a progress update will be provided in around 48 hours.” 

Though the company says alternative plans are in place to temporarily make up for the shortfall, such as tapping Aramco’s global storage network, the 5.7 million barrels a day outage is the single worst supply disruption even over and against that brought on by the first Gulf War and the 1979 Islamic Revolution in Iran.

“If it’s protracted it could be a big challenge for the oil markets,” Mele Kyari, CEO of Nigerian National Petroleum Corp. told Bloomberg Television on Sunday of the “significant disruption”. 

#UPDATE @Saudi_Aramco incident, gif via @nasa shows how flaring continues across various oil/gas facilities in #saudi to relieve pressure within integral pipelines as the main oil processing/stabilisation complex in #Abqaiq goes offline – With @Obs_IL & @sbreakintl pic.twitter.com/AZYwRH7guM

— d-atis☠️ (@detresfa_) September 15, 2019

Meanwhile NASA satellite imaging showed that 24 hours after the attack, smoke over Abqaiq had dissipated, but elsewhere in Ghawar oilfield, the world’s largest, multiple massive plumes were still visible.

Though other installations like Ghawar were not attacked, excess oil and natural gas going to Abqaiq have to be burned off via relief flares due to emergency shutdowns.

It is NOT under control, as the BBC claims.

Stil burning.

Fresh pics via Snap. pic.twitter.com/wLOiGDzps6

— Brasco_Aad (@Brasco_Aad) September 14, 2019

Hours into the daylight hours of Saturday even after Saudi authorities and state media claimed the fires were “under control”, skeptics analyzing local photos as well as satellite imagery said it wasn’t the case that the facilities had blazes under control as fast as they claimed.

Here is a brief line-up of early reactions from market trader and analysts via Reuters:

* * *

Bob McNally, Rapidan Energy

Crude prices would spike by at least $15-20 per barrel in a seven-day disruption scenario and go well into triple digits in a 30-day scenario.

“This does not include what are likely to be large (if difficult to model or predict) premia to reflect zeroing out of global spare production capacity amidst ongoing disruption risks, hoarding, and panic sentiment.”

Greg Newman, Onyx Commodities

Expects Brent futures to open $2 per barrel up and close $7 to $10 per barrel higher on Monday. The market could see a return to $100 per barrel if the issue cannot be resolved in the short term.

In the swaps market, Dubai timespreads could see a $1.50-$2 barrel backwardation as end-users scramble to cover shorts for short-term loading.

Refined product prices will be strong, with particular emphasis on high-sulphur fuel oil given current tightness and that it is the refinery product most closely linked to Saudi heavy crude.

Ayham Kamel, Eurasia Group

“A small $2-$3 per barrel premium would emerge if the damage appears to be an issue that can be resolved quickly, and $10 if the damage to Aramco’s facilities is significant.”

“The scale of (the) attack will encourage markets to re-examine the need for considering an oil geopolitical risk premium … The attacks could complicate Aramco’s IPO plans given rising security risks and potential impact on its valuation.”

“The U.S. would only release crude from its strategic reserves if damage to infrastructure appears critical or oil prices spike significantly.”

Samuel Cizul, Els Analysis

“The outage of 5 million barrels per day (MMbbl/d), roughly half of the current Saudi production level and about 5% of global supply, is very large by historic standards. It would in relatively few weeks start to put a stress on the market.”

“This incident is a very uncomfortable wake-up call to radically higher risk premiums on Gulf production.”

Christy Malek, JP Morgan

“I’d expect a $3-$5 move in oil prices in the short term. The market has been sleep-walking in risk premium in the region, disproportionately focusing on risk to demand growth and shale oil supply.”

“This attack introduces a new, irreversible risk premium into the market.”

Expects oil to rise to $80-90 a barrel over the next three-six months as the market turns its focus to geopolitics.

Gary Ross, Black Gold Investors

“The heart of the Saudi oil industry has been successfully attacked so look for prices to rise substantially to $65-$70 per barrel.”

“These attacks are difficult to stop and could occur periodically. The market has to price this risk in.”

John Driscoll, JTD Energy

“This is significant as it takes out twice the volume of the spare capacity in the market, which is at 2-2.5 MMbbl/d”

“There’s going to be an initial panic reaction. Anyone who’s hedged on the short side will want to get out quickly. This may cause a significant spike upwards.”

Tilak Doshi, Muse & Stancil

“In the oil universe, this attack is perhaps equivalent to the 9/11 attacks … Abqaiq is easily the world’s single most important oil production and processing infrastructure site.”

“This puts Iran’s wars-by-proxy in the region squarely in the centre of the security concerns of the Middle East.”
“For Asian governments, perhaps this overtakes the perennial concern about the safety of tanker traffic in the Strait of Hormuz with even more serious concerns about the impact of a direct breakout of hostilities between the Saudi alliance and Iran.”

“Governments throughout the Asian region will perhaps now be more supportive of the U.S. administration’s tough sanctions regime on Iran.”

* * *

Without doubt, the world awaits for the looming potential shock in energy prices as markets open at the start of this week.