Tag: finance

Authored by Richard Breslow via Bloomberg,

This is crazy stuff. The market wants to conclude that honor has been served in the Middle East and we can all stand down and move along. The central bank can keep its powder dry for the next upset. Fed funds futures are back to flat, so there must not be anything to concern ourselves with. Such is the enduring influence of a world that turns on low rates forever. And lower pro re nata.

Extraordinary.

Now we are being told, traders were “prepared” for the latest episode so they were able to take it in stride. I assure you, when the events of last night were taking place, no one in the market knew where all this was headed. And it seems doubtful that the matter is now closed. But for the moment, it is what it is, and traders will have to deal with it.

Once again it has been demonstrated that prudence doesn’t pay in an environment where all of the incentives are geared toward encouraging taking on more risk.

The talk about asset bubbles and over-leverage is cheap. Investors know what they are supposed to do. And if they think the message needs to be reinforced, the six Fed speakers still to come this week will no doubt be prepared to soothe our nerves.

Ten-year Treasury yields certainly bent but did not break. They ran down to 1.70% which is a picture perfect technical place for them to have stopped. Remember that level going forward. North America looks to be starting the day with yields back above trend line support and caught between close Fibonacci support and resistance levels. How that plays out, the market seems unprepared to decide. One of the more interesting trades overnight was through options targeting a move higher to 1.90%. A modest move, but perhaps directionally informative.

S&P 500 futures have behaved more than impressively. They had every reason to crack when they briefly broke near-term support but have held up like champions. They trade like people need them. Now we’ll have to see if the index can reward the bulls by building up some upside momentum. In any case, it’s obvious that it is the strong hands that are long. Now we’ll see if they have infinite patience.

The dollar, perhaps second only to the yuan, makes currencies a very important asset to keep a close eye on today. It’s demise has been predicted by many, but it certainly doesn’t look like it’s ready to oblige. The Dollar Index is pushing up against meaningful resistance that will either be a multiple top or signs of a potential next leg higher. It’s definitely in play. Given how the euro and yen are trading, it seems hard to fade the move just yet, if so inclined. So far, so much, for this being the year Europe was going to be the star of the show. The entire spectrum of currencies trade like the market has just been the wrong way around and their positions are being sorted out for them. They are fortunate that the overall moves have been somewhat modest.

Emerging market currencies as a broad asset class have been a very tough trade so far this year. Investors want to be long. December certainly put that notion in their heads. The thing to watch is if the lack of momentum causes a rotation into the high yielders and they become overly subscribed and riskier than they look.

The market is behaving as if events in the Middle East are yesterday’s news. We’ll see if that continues to be the case.

Oil prices exploded overnight after the initial leg from API and then the Iranian missiles strikes, but thanks to a pair of tweets from Trump and Zarif that “all is well” and “operations are concluded,” prices reverted back to unchanged.

“Not a single drop of oil supply has been lost due to the recent incidents and that is why the oil price so quickly has fallen back down again,” said Bjarne Schieldrop, Oslo-based chief commodities analyst at SEB AB.

Last night’s API data did move the crude market, before the Iranian chaos started, so we suspect – after the overnight rollercoaster – that this morning’s official data will spark some notable reaction.

API

• Crude -5.95mm (-3.6mm exp)

• Cushing -1.0mm (-660k exp)

• Gasoline +6.70mm (+2.7mm exp)

• Distillates +6.4mm (+3.9mm exp)

DOE

• Crude +1.164mm (-3.6mm exp)

• Cushing -821k (-660k exp)

• Gasoline +9.137mm (+2.7mm exp) – biggest build since Jan 2016

• Distillates +5.33mm (+3.9mm exp)

A big draw in the prior week, and big draw reported by API, were blown away by a surprise crude inventory build and huge product builds…

Source: Bloomberg

US Crude production was unchanged on the week, remaining near record highs…

Source: Bloomberg

WTI was trading just below $62 ahead of the DOE data and dropped to the day’s lows on the surprise build…

WTI Crude prices have not only erased last night’s surge but almost entirely erased all of the post-Soleimani-death spike…

And Brent, which exploded over 5% last night, is plunging back…

Source: Bloomberg

The market’s relatively muted response is another sign that global supplies are in an era of abundance, largely powered by the American shale-oil revolution.

“We are not forecasting a shortage of supply unless we have a catastrophic escalation, which we don’t see,” United Arab Emirates Energy Minister Suhail Al Mazrouei said in Abu Dhabi.

OPEC Secretary-General Mohammad Barkindo said he was “confident that our leaders are doing everything possible to restore normalcy.”

But, “if Iran seeks further targets for retaliation to the killing of Soleimani, but without crossing declared U.S. red lines that would prompt a military response, energy infrastructure may be appealing,” said Jason Bordoff, a former Obama administration official who now works at Columbia University.

An actual supply disruption would send prices soaring, depending on the magnitude and expected duration of the outage, he said.

Via JonathanTurley.org,

There have been a highly disturbing increase in anti-Semitic attacks around the world.

Not surprisingly, those carrying out such attacks tend to be disturbing or extremist elements.

Tristan Morgan fits that profile and showed that his overwhelming hate is combined with an underwhelming intellect. Morgan succeeded in lighting his own head on fire in trying to burn down a synagogue and then walked away laughing in front of witnesses.

A CCTV video shows Morgan, 52, casually walking to the back of the synagogue and breaking a window with an axe. He then returns with a gas can and pours gas into opening. He then lit the gas which blew back on him and left him putting out his own flaming head:

He was arrested at his home where he was found smelling of gas with burns on his hands, forehead and hair. Morgan has reportedly admitted arson and has a long history of extremist and anti-Semitic views.

Morgan works as a hospital X-ray technician and performs as a folk singer on the side.

Saudi Aramco shares have dropped 11.5% from their IPO peak, and still, the shares are overvalued. 

Shares closed on Wednesday at their lowest level (34.15 riyals (($9.10)) since trading began on Dec. 11, after Iran launched more than a dozen ballistic missiles at multiple US military bases in Iraq. 

The killing of Iran’s top general Qassem Soleimani last Friday, and the retaliation strikes by Iran on Wednesday, have caused a massive divergence between sinking Aramco shares and surging oil prices. WTI rose 5% to 65.50 on the news of Iranian missile strikes in Iraq. Brent briefly spiked to the 71 handle, and both oil contracts have faded since the attacks. 

Aramco shares didn’t benefit from spiking oil prices because its oil facilities are in striking range of Iran.
*missile chart

The Sept. 14 attack on Aramco’s oil processing facilities at Abqaiq and Khurais in eastern Saudi Arabia revealed how Patriot batteries failed to guard high-value assets in the country from Iranian threats.

Russ Mould, AJ Bell investment director, told MarketWatch that investors are concerned Aramco could be the next target of an Iranian missile strike. 

“Also, there’s perceived to be a higher risk associated with assets based in the Middle East as they’re so much nearer to any potential further military actions,” Mould said. “One of the risks with Aramco was always a higher risk premium because of where they’re based and the uncertainty in the Middle East. I guess it’s just a reflection of that today more than anything else.”

He said Aramco shares are highly exposed to geopolitical risk and won’t benefit off higher oil prices.

He added: “In the short term in the international context the shares look expensive relative to their peers, so I personally wouldn’t be falling over myself to buy the shares.”

Blain’s Morning Porridge, submitted by Bill Blain

“Quit behaving like a family and become more like a team. If you don’t perform, you don’t stay on the team…”*

In the wake of missiles and plane crashes, it’s likely to be the kind of day market analysts refer to as: “fast evolving”. 

The big news is about Iran shooting off a bunch of dumb missiles at well prepared US bases in Iraq.  But we’re not asking questions about how an ant of a country like Iran hopes to hurt the American Elephant… The uncertainty is all about how the American President will react.  And if Trump does decide to go full Travis Bickle and retaliates – what signal might it send? Small terrorist-harbouring nations assuming asymmetric warfare means they are protected by the basic decency and the established law and order of the West… will have to think again. 

It’s going to be interesting… 

After yesterday’s histrionics and crowd stampede at the funeral, the Iranians had no choice but to respond to the Soleimani execution.. Firing fairly inaccurate ballistic missiles off into the desert at well dispersed airbases makes lots of noise and looks spectacular – but are unlikely to have caused much damage or casualties (unless both sides got unlucky.)  

Trump can shrug it off, look statesman-like, and get on with the main business of the November election. Or maybe something dramatic – say the USAF carpet bombing Tehran with leaflets just saying… “Next Time..”  That’s probably over-subtle for Donnie. 

My bet is that whatever happens next, markets will quickly shrug it off…. The chances for de-escalation look high, but…. 

Gold

It’s not often I write about Gold.  However, so many articles are talking about why we might be in a Gold Bull Market, it’s probably worth thinking about.  Yesterday I was chatting to my commodities colleague, Ashley Booell.  Last year, he predicted Gold would enter a bull phase, calling for$1580 in mid 2019 – which it hit.  Now his target is $1630, and if it builds a “proper foundation” there, then a $2000 scenario is possible. 

Ashely says: “A lot of people describe gold as a hedge against inflation and a store of value. I’d go further by saying that gold is insurance against market and geopolitical insanity. And right now, things are bloody insane.” He predicted gold could rally on the trifecta of market risk, geopolitical risk and recession risk. “Have these gone away? Hell no!” he told me. 

“They’re like the three parts of a trident wielded by a very angry titan that can’t wait to shatter the financial system. But jokes aside, it is rare for these three risks to be so strong at the same time. Each of them can easily add $ 100 to gold’s price if things get bad.” 

Sure enough, Gold hit $1620 last night before sliding back a tad.  

Aside from reacting to market events, what is the point of Gold? Its only inherent values are its scarcity and an indicator of inflationary threats.  It yields diddley-squat – just like a bund! It massively over-performs in time of panic and meltdown, and massively corrects as calm is restored.  Its primary investment purpose is as an inflationary hedge, but that vanished following the death of inflation after central bank monetary experimentation – leading to a price collapse in 2013 when it became clear financial asset inflation was de-linked from real world deflationary threats as a result of QE and other policy mistakes. 

Why is Gold now rising? All risk assets rose through 2019 on the back of easy monetary policy, and Gold got dragged higher in the slipstream, and because it might prove a hedge if the Central Bank confidence rally broke. The move this year is largely ascribed to unpredictable US policy and potential instability in the wake of the assassination of General Soleimani. 

But… there is also an element of the rise that is due to increasing signals that rising inflation expectations are returning. There are similar signals in rising market activity in inflation linked bonds and hedges. Is Gold telling us something about inflation we don’t understand or haven’t spotted? 

Boeing

The other big news overnight has been the story about a B-737 800 crash outside Tehran. It was a relatively new plane – but a precursor model to the cursed 737 Max. It was operated by Ukraine International Airways which has a modern properly maintained fleet, and a decent track record. The fact the aircraft suddenly vanished as it climbed after take-off around 9000 feet with no emergency called is worrying.  The shout it was an accident looks suspiciously swift to me. It could be weeks/months before we know what happened. 

Boeing itself remains in the news. There are rumours Warren Buffet has been building a stake in the troubled planemaker. That’s intriguing. With nearly 400 finished B-737 Max aircraft sitting useless on the tarmac unpaid for, sacking the CEO over Christmas, rumours the company will need to raise money from the bond market, serious questions about its management structure, it looks like a company in serious trouble. This great article in the WSJ – Botched Predictions, Strife with Regulators Cost Boeing CEO His Job – is well worth a read. 

What makes Boeing so interesting? Is this the right time to buy? The stock seems incapable of going much lower. Its not just that its core to the US military industrial complex, a massive multiplier across the US economy and the biggest stock on the Dow. It’s attractiveness is all down to its “Moat”. 

I suspect Moat will become the most overused word of 2020 – it basically means how entrenched and resilient to competition a company is. Boeing has a very deep and wide Moat around itself – it will take years for any competitor to build up the logistical scale, product range and knowledge, and relationship strengths to compete head to head with the Boeing/Airbus monopoly. 

On the other hand, Boeing’s decision to not build a 737 successor years ago, and the fact it cash strapped today opens the chance for someone to think about trying to bridge that Moat. Boeing will need 7 years and $30 bln dollars to introduce a new plane. Anyone fancy a go? 

· Anyone intrigued by this morning’s quote – it’s taken from a comment by former McDonnell Douglas CEO Harry Stonecipher. It’s an old story, but important to understand in terms of where Boeing went wrong. Famously when Boeing acquired rival airplane maker Mcdonnell Douglas it became referred to as “Harry buying Boeing with Boeing’s money”. The engineering centric ethos of Boeing was lost as McD costcutters took over. 

Carlos Ghosn

The other other big event today will likely be the Carlos Ghosn press conference. It’s well worth reading the story of his escape, but I can’t wait to hear him stick it to the Japanese and Nissan.  But, really, what will it tell us? That Japan is different and does things differently?  That is hardly enlightening. 

Norway’s airport suffered a major fire yesterday at a parking garage on the premises. The fire resulted in air traffic being grounded and an evacuation of the facilities.

Scattered unconfirmed social media reports have pinned the blame on an electric vehicle catching fire, though many details have been unconfirmed.

The official statement from authorities is that the cause of the fire is “unknown” despite being notified first that an electric vehicle was on fire, according to Bloomberg. 

The fire spread to several floors of the parking garage and was contained by 9:30pm local time. There were no reports of injuries, but there was risk the building could collapse as firefighters fought the flames into the evening. 

Hundreds of cars were destroyed as a result. The garage in question has a capacity for 3,000 cars and was “nearly full” when the fire started. 

All flights from the airport had to be cancelled for the rest of the day as a result, even causing Norway’s Prime Minister Erna Solberg to change her travel plans.

Video from the fire was posted here:

We will continue to monitor this story and will update it as information becomes available. 

 

Authored by Paul Joseph Watson via Summit News,

An Iraqi militia leader reacted to the airstrike on Iranian General Qassem Soleimani by suggesting American citizens could be targeted if they re-elect Trump.

The deputy commander of Iraq’s Popular Mobilization Forces (PMF), Abu Mahdi al-Muhandis, was one of the Iraqi officials killed by the drone strike on Soleimani last week.

Now Jawad Al Telbawi, a commander of one of the factions within the PMF, says American civilians may be targeted if they return Donald Trump to the Oval Office.

After threatening the “fool and a blackmailer” Trump as well as the U.S. military, Al Telbawi also demanded that American citizens “pressure” Trump to withdraw U.S. troops from Iraq “before we send your soldiers back in coffins.”

He also suggested American civilians could be the target of terror attacks.

“If the American people re-elect Trump to the US presidency [in 2020], this would mean they support his crimes,” said Al Telbawi.

“This may change our position towards the American people. All American interests in the region will be at risk.”

*  *  *

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There is a reason why, depending on how one calculates it, passive, i.e. index and ETF, fund assets under management have either already surpassed active, or will do so in the next two years…

… and more so than the exorbitant fees charged by active investors which can reach 3% and 50% in some grotesque, megalomaniacal cases, it is due to the dismal performance of the actively managed fund industry, which for 10 years in a row failed to outperform the broader market (although with central banks now actively micromanaging the stock market, one can hardly blame them – after all, with no risk of a drop, there is no need to hedge exposure).

However, it’s not just failing to outperform the market that has resulted in a near record 8 consecutive months in hedge fund outflows and the fewest hedge fund launches since the year 2000.

According to Bank of America, only 11% of large cap active funds beat their benchmarks for the decade, which was not only a “tough environment for active managers”, but was catastrophic for the confidence of their LPs, who redeemed the most capital in years despite 2019’s stellar S&P performance.

Here, according to BofA’s Jill Carey Hall, is why the 2010s was a decade hedge funds and active investors can’t wait to forget: “Only 11% of large cap active funds beat their benchmarks for the decade. The past 10-year period posed unique challenges for active funds.” 

The most deleterious aspect was the fight against a wave of redemptions, a fight which countless hedge funds lost, and led to the shuttering or family office conversion of some of the most respected funds in 2019.

As a result of this tremendous industry shift, passive funds now represent almost half of all US domiciled fund assets vs. just ~20% back in 2009.

Meanwhile, if hedge funds wish to rage at someone for their dismal performance, they may as well address their grievances to the Marriner Eccles building: the benchmark itself was particularly hard to beat, as the 257% return for the S&P beat almost every other broad market index.

And another fascinating fact from BofA: within the S&P 500, the percentage of stocks that outperformed the benchmark for the decade was a mere 32% vs. almost half in the prior decade. In other words, just a handful of stocks generated the bulk of the S&P’s return, someone we discussed over the weekend in “Just Two Companies Accounted For Nearly 20% Of The Market’s Entire 2019 Return.“

Finally, and as shown in the chart above, leadership was concentrated amongst mega cap companies which according to BofA, “are difficult to overweight given the amount of fund concentration required.“

Below we present some more observations on active management courtesy of BofA:

While benchmarks posted the best year since 2013, large cap active managers closed 2019 with just 28% outperforming their Russell 1000 benchmarks, the lowest hit rate since 2016 when only 19% of funds beat their benchmarks. This follows two straight years of over 40% hit rate (48% in 2017 and 43% in 2018). Quantitatively-focused funds struggled even more in 2019, with just 12% beating the Russell 1000 index, underperforming by 4% on average.

Why the struggle? Anti-yield and anti-quality bias

With persistently low interest rates over the past decade, the reach for yield was prevalent. Amid equity factors, High Dividend Yield was the best performer of the decade, returning 315% over the 10-year period vs. the S&P 500’s 257% gain. But large cap active managers consistently maintained a lower dividend yield than the benchmark (32bps lower on average) during the period.

Additionally, dividends drove more than a quarter of the S&P’s total return during the decade and active managers’ lower yield exposure likely dragged on their performance. Large cap active managers were also consistently underweight High Quality stocks (“B+ or better”), which outperformed Low Quality (“B or worse”) stocks by 68ppt during the decade. Active funds’ exposure to High Quality stocks were 2.5% lower on average during the period.

One final reason why outperforming the market was nearly impossible in 2019, and the past decade, performance dispersion for large cap equities rose in 4Q, but remains below the long-term average of 45%. Meanwhile, performance dispersion increased within small caps in 4Q to above average, while it declined within mid caps and remained below average.

Submitted by Michael Every of Rabobank

Theatre; or Theatre of War

The day starts with news from Iranian TV, confirmed by the Pentagon, that Iran’s Revolutionary Guards Corp has fired “tens” of surface-to-surface missiles from within Iran itself at a US airbase in Iraq. US President Trump is aware of the situation and is monitoring it.

Iranian forces have not directly confronted the US like this before: previous attacks have come through proxies like militias. To attack so openly, and in defiance of US Trump’s recent warnings, and from within Iran itself, is a clear escalation that is also an act of war by any definition. For an Iranian economy in free-fall, which despite home advantage has no hope of actual military victory in a face-to-face confrontation with the States, this seems a remarkable, dramatic, and, most worryingly, illogical move.

At this stage, with news hazy and facts on the ground absent, there appear two realistic scenarios. One is that this attack is theatre to placate the large crowds who were so recently on Iran’s streets. The alternative is that Iran has genuinely decided to test Trump by also upping the ante. The only way to tell is if there are US casualties.

If we get images of dead and injured US soldiers, then the worst-case scenarios begin to open up. If no real damage has been done by these missiles, but Tehran gets to show the crowds it responded, then more positive possibilities are still available. We will find out shortly – but breaking news is that there are ‘only’ Iraqi casualties, according to its Ministry of Defence. It remains to be seen if that is a red line for Trump, or is the kind of collateral damage he was expecting after taking out former IRGC head Soleimani.

Given that this move from Iran appears totally out of keeping with their usual strategic acumen, either the loss of Soleimani has meant a total loss of talent, and/or self-control, or this is indeed a token level of revenge. I will *cautiously* stick to that interpretation for now.

However, as we go to press–and bearing in mind that much news at this stage of the fog of what might be war often proves not to be true in hindsight–Iran might have launched a second wave of attacks, Iraq announce military operation “Overwhelming Response”, and the Iranian air force has apparently been deployed and is in Iraqi airspace. Iran is also warning that if the US responds to this attack, the next wave of Iranian missiles will “destroy Dubai and Haifa” (in Israel).

Indeed, in Asia this morning we see oil up again, gold up again, USD/JPY at 107.7, AUD/USD at 0.6851, and US 10-year yields at 1.71%, down over 10bp – and all on this news, not due to a data-release.

Meanwhile, yesterday also saw China’s Global Times arguing that there is no rush for the US and China to sign a trade deal, and while underlining that it wants a deal, also implies that it does not agree to the terms set out publicly by the US side. Is this a last-minute negotiating tactic? Or is it a genuine reflection that the two sides are once again not on the same page, and that the deal will collapse, or not be complied with, or perhaps not even be signed? Again, this comes down to either theatre from China, or the US and China going back to the theatre of trade war. That should be injecting a high degree of uncertainty into markets – but Iran obviously just eclipsed them.

Following November’s dismal disappointing employment change (+66.9k – 2nd weakest since March 2010), analysts expected a rebound in jobs growth in December, and it rebounded dramatically.

November’s +67k was revised dramatically higher to +124k and December printed +202k (vs +160k expectations). This is the highest employment gain since April

Source: Bloomberg

Both Services ands Goods sectors added jobs, with a adramtic rebound in manufacturing…

Source: Bloomberg

“As 2019 came to a close, we saw expanded payrolls in December,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute.

“The service providers posted the largest gain since April, driven mainly by professional and business services. Job creation was strong across companies of all sizes, led predominantly by midsized companies.”

 

Mark Zandi, chief economist of Moody’s Analytics, said, “Looking through the monthly vagaries of the data, job gains continue to moderate. Manufacturers, energy producers and small companies have been shedding jobs. Unemployment is low, but will begin to rise if job growth slows much further.”