Tag: finance

If ever one was in doubt about whether or not a brand can still command a premium price in the market, look no further than the recent global auto OEM valuation comparables produced by JPM.

One look at the comparable charts and you’ll quickly notice that Ferrari is commanding a staggering brand premium from investors.

 

Even after taking into consideration that profitability (using EBITDA margin as a proxy) is significantly higher than industry competitors, we can definitively conclude that brand premiums are alive and well, although the same can’t be said for the sanity of investors.

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Via Dana Lyons' Tumblr,

The recent decline in the U.S. Dollar has people wondering where it might stop; its chart suggests right here is as good a spot as any.

Increasingly, the talk surrounding financial markets lately has centered around the U.S. Dollar (USD). Specifically, the focus is on the 5-month decline in the USD. Obviously, as much as any asset, the behavior of the USD has an impact, directly or indirectly, on many other assets within the financial markets. Thus, with the USD falling as it has recently, it has received much of the blame (or credit) for the unwanted (or welcomed) consequences on the behavior of other assets.

Therefore, market participants are wondering where is the drop in the USD going to stop? Today’s Chart Of The Day takes a peek at the chart of the U.S. Dollar Index (DXY) to identify potential areas of support. As it turns out, probably the most convincing level in terms of its likelihood in providing support is right where the DXY is currently trading, near 92.50. As the following chart shows, there are a few lines of interest here that may serve as potential support. These include:

• The 38.2% Fibonacci Retracement of the DXY’s big rally from July 2014 to March 2015.
• The 61.8% Fibonacci Retracement of the rally from the December 2014 interim low to the March 2015 high.
• The bottom of the 14-month trading range since the March 2015 top, which was tested a couple of times last year.
• The 500-day simple moving average
• The top side of the post-March 2015 down trendline that was broken in October of last year.

 

 

Additionally, if we zoom out a little bit, we find another line of interest in its potential to provide support here (the key word being potential). This is the top side of the down trendline from the DXY’s 1985 all-time high, connecting the 2001-2002 highs. The DXY broke through that trendline in its final push to its March 2015 highs. Subsequently, the lows in May and August 2015 seemed to find support near this long-term trendline.

 

 

On a side note, so-called “smart money” commercial hedgers in the USD futures market are showing their smallest net short position since the 2014-2015 rally began. They have not yet reached a net long position, which has coincided with several intermediate-term bottoms over the past decade. However, what was a potential headwind a year ago is no longer one.

On another side note, the clamor over the USD’s decline seems a bit of a reach to us. In our view, the USD has really been in a sideways trading range over the past 1 year plus. Considering the magnitude of the preceding rally, the counter-trend move has actually been extremely mild. In fact, going back 45 years, the size of the DXY’s range of the past 14 months is in just the 9th percentile of all periods. In our view, while there are always exceptions, this type of action is often characteristic of a continuation pattern. That is, once the pattern runs its course, the likely direction of prices is a continuation of the preceding trend, i.e., up.

So will the buck stop here? We have no idea. However, based on a glance at the intermediate-term and long-term charts of the DXY, current levels offer as compelling a confluence of potential support as any down to the July 2014 liftoff area.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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Just two days ago, a veteran executive of Turkey’s ruling Justice and Development Party (AKP) party said that neither an early election nor an extraordinary party congress is on the agenda amid rising speculation over the party’s highest decision-making body’s move to remove the authority to appoint provincial party officials from Prime Minister Ahmet Davutoglu.

As Hurriyet reported on May 2, the 50-seat Central Decision and Executive Board’s decision, which was made with the support of 47 members on April 29, has been widely considered as one of the clearest signs yet of tensions between President Recep Tayyip Erdo?an, the founding leader of the party who wants an executive presidency, and Davutoglu, who would be sidelined if the country’s parliamentary system were to be replaced.

“We just held our congress recently. We have Turkey’s problems and things we have to fulfill on our agenda. Neither congress nor early elections are on our agenda. The elections will be held in 2019,” AKP Deputy Chair Mehmet Ali Sahin said in an interview with NTV on May 2. 

Sahin’s remarks were in response to a comment by main opposition Republican People’s Party (CHP) leader Kemal Kilicdaroglu, who suggested there were signs indicating preparations by the ruling party, which secured a single-party government in the Nov. 1, 2015, early elections to govern Turkey for four years, for yet another snap election. The AKP’s party congress was held in September 2015.

In other words, anything suggesting the cracks between the PM and the president are getting wider would be seen as confirmation that Turkey is suddenly embroiled in a bitter, behind the scenes scandal.

Indeed, Sahin downplayed talk of an internal crisis in relation with the MKYK decision and said, “Nobody should expect the AKP to shoot itself in the foot.” “If they want to go to early elections, then they should table their own proposal for this,” Sahin said.

Sadly for Turkey, and for those long the Turkish Lira, it appears that the fissures were indeed as bad as some had speculated because moments ago Bloomberg blasted the following:

• TURKEY’S AK PARTY SAID TO PLAN CONVENTION IN 15 DAYS

Bloomberg adds that Turkish Prime Minister Ahmet Davutoglu will take the ruling party to an extraordinary congress amid a widening rift over leadership with President Recep Tayyip Erdogan, according to a person familiar with the matter.  Davutoglu to hold a press conference Thursday at 11am, CNN- Turk reports.

Davutoglu had met with Erdogan in Ankara today to ask that the president respect the prime minister’s authority and allow him to do his job; Davutoglu was said to be considering an extraordinary convention to vote on AK Party leadership should he not be able to reach agreement with Erdogan at the meeting, the person said

The implication is that the prime minister, Davutoglu, who has been engaging in crisis talks with Erdogan over the past weeks, may be about to resign but not before he creates a major rift within the AKP. For those unfamiliar with the back story, here is the FT:

Recep Tayyip Erdogan, Turkish president, held crisis talks on Wednesday with Ahmet Davutoglu, his handpicked prime minister, in an effort to resolve a deepening rift that has spooked financial markets and fuelled speculation that Mr Davutoglu could be about to resign. The possibility that Mr Davutoglu, who has become frustrated by Mr Erdogan’s attempts to limit his independence, may quit helped to drive Turkish stocks 2 per cent lower on Wednesday.

 

 

The prime minister, a soft-spoken academic-turned politician, has proven to be an effective negotiator with the EU, but incapable of outmanoeuvring Mr Erdogan’s supporters in both the media and parliament. Wednesday’s meeting in Ankara was described by one person close to Mr Davutoglu as an “urgent crisis”.

 

On Friday, while Mr Davutoglu was overseas, the ruling AK party stripped him of the ability to choose local and provincial leaders. This deprived him of a vital source of influence over the party’s rank and file, who remain loyal to Mr Erdogan, the most popular leader Turkey has had in more than half a century.

 

Mr Davutoglu, who addressed parliament on Wednesday with uncharacteristic brevity, hinted at his own resignation. He said that he was prepared to shun, “with the back of my hand, any job that a mortal would not think of leaving”.

Needless to say, the PM was unhappy at this attempt to more of his control, an action that was clearly spearheaded by none other than Erdogan.

The market’s reaction was immediate.

Upon confirmation that a major schism is developing within the AKP, the Lira crashed a whopping 4.5%, margining out countless longs, and plunging the most since October 2008.

 

FX traders’ plight aside, if the convention is confirmed, it means that Turkey is about to be swallowed in yet another bitter political crisis, which will likely result in Erdogan concentrating even more power, unless of course he is stopped which in turn would meat more rioting, more civilian casulties, and even less media freedom to describe one nation’s collapse into a despotic, authoritarian state.

Ultimately, should Turkey end up with a political vacuum, then suddenly the fate of millions of refugees will become very unclear; and if those refugees start making their way to Europe once again then the implications for Merkel and the rest of Europe’s leaders will be dire.

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Just a month after the UK's luxury housing bubble burst, it appears the nice friendly bankers at Barclays are looking for some scapegoats to flip their condos to.

In London, as Bloomberg reported, demand has slumped so badly that developers are offering discounts of up to 20% for their newly constructed homes. And just as the case was in Manhattan, it’s a result of the UK putting in a speed bump. The UK recently increased taxes on those deemed to be purchasing a second home, specifically designed to slow the pace of overseas investment. 

According to Bloomberg, the U.K. government’s plan to increase sales taxes on second homes in Britain will also apply to people who live abroad.

From April, buyers of second homes and buy-to-let properties in the U.K. will be subject to stamp-duty sales tax that’s 3 percentage points higher than those who are buying a home to live in, U.K. Chancellor of the Exchequer George Osborne announced in November. In deciding whether an individual is purchasing an additional home, the government will also consider assets outside the U.K., according to a consultation document published on Monday.

 

“This means that if someone is purchasing their first or only property in England, Wales or Northern Ireland, they may pay the higher rates if they own property outside these areas,” the document shows.

 

Demand from overseas buyers has contributed to a jump in London house prices, and off-plan sales abroad helped developers finance projects including Battersea Power Station. House prices in the city rose 7.7 percent in the year through October, according to the Office for National Statistics.

The takeaway then is that the housing recovery has been driven primarily by a steady flow of foreign investment, and not necessarily the underlying economic fundamentals improving…

And so bankers are looking to kep the ponzi dream alive by any means possible.

In what appears like a desperate act of rearranging deck chairs on the titanic (or dancing while the music is playing like in 2007/9), The Daily Mail reports, Barclays has brought back the 100 per cent mortgage – the first major bank to do so since the last financial crisis…

Its decision will give hope to first time buyers, who can get a three-year fixed rate deal at 2.99 per cent without putting up their own cash.

 

Until now buyers would need to give the bank at least a five per cent cash deposit based on the purchase price.

 

Such 100 per cent mortgages were axed after lenders were criticised for making irresponsible loans – and Barclays itself narrowly avoided a bail-out after the financial crash in 2008.

 

Rachel Springall, a spokesman for website Moneyfacts.co.uk, said that Barclays' large high street presence is likely to make it particularly attractive to those struggling to raise a deposit.

 

She said: 'At 2.99% the three-year fixed mortgage is reasonably priced, but buyers must be aware that their parents or guardians must deposit the full 10% of the property price and they will not have access to this money for three years.

 

'Guarantor mortgages spread the risk among both the buyer and the depositors so they should not be taken on lightly.'

 

The lender has also increased the maximum amount homebuyers can borrow as a multiple of their income.

 

Those earning more than £50,000 a year will be able to borrow up to 5.5 times their annual income, up from 4.4 per cent at present. And a buyer with no deposit could get a three-year fixed rate mortgage at just 2.99 per cent.

Zero per cent deposit mortgages have not been offered since the financial crisis. These risky home loans used to be widely sold by lenders, but were withdrawn after the collapse of Northern Rock in September 2007. What could go wrong?

Mortgages which let people borrow more than the value of their home were dramatically scrapped in 2008.

 

Before Christmas in 2007, a third of lenders offered mortgages of 100 per cent or more.

 

Some including failed bank Northern Rock offered 125 per cent deals.

 

Experts said there were two reasons for the retreat – lenders themselves were struggling to raise money for loans, and they were also worried about handing it over to the highest-risk borrowers.

 

Brokers London & Country said that before the financial crisis the number taking out 100 per cent mortgages 'more than doubled' in the last year of deals.

 

Before the crash there were a record 155 such mortgages on offer.

 

They let people escape the cycle of trying to save while paying for rented accommodation.

 

But if prices begin to fall, or they lose their jobs, they would face disaster.

But hey, the bank will have flipped its mortgages into the securitization market by then.. and besides, Denmark is paying people to take out mortgages. Welcome to the new abnormal.

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Earlier today, Obama landed in Flint, Michigan, his first visit to the city since its contaminated drinking water crisis began two years ago. Air Force One landed at Bishop International Airport and Gov. Rick Snyder was among the officials waiting on the tarmac to greet the president.

With him, Obama brought a message of hope to residents of Flint, Michigan: a promise for change after lead from old pipes tainted their drinking water.

Obama’s first order of business in Flint was to receive a briefing on the federal response to the crisis, then to meet with city residents. He had declared a state of emergency in mid-January and ordered federal aid to supplement the state and local response. At that point, however, the crisis was in full bloom. It actually took several months for the nation to focus on the beaten-down city’s plight, raising questions about how race and poverty influenced decisions that led to the tainted water supply and the beleaguered response once problems surfaced. More than 40 percent of Flint residents live in poverty and more than half are black.

To be sure, the topic of Flint’s lead-contaminated drinking water has become one of the core issues on the Hillary campaign trail.

In an effort to save money, the city, while under state management, began drawing its water from the Flint River in April 2014. Despite complaints from residents about the smell and taste and health problems, city leaders insisted the water was safe. However, doctors reported last September that the blood of children contained high levels of lead.

The source of the city’s water was subsequently switched back to Detroit, but the lead problem still is not fully solved, and people are drinking filtered or bottled water.

So what did Obama do? The same thing Japanese authorities did when they arrived in Fukushima to “prove” they are not lying about the latent raioactive threat: he drank the Flint water.

President Barack Obama drinks a glass of filtered Flint water during trip to Flint http://pic.twitter.com/NOmptb0Rnm

— Ryan Garza (@ryangarzafreep) May 4, 2016

There was just one problem: Obama drank the filtered water.

The president drank filtered Flint water for the press after I asked him if it was local water. http://pic.twitter.com/z33ksET6ao

— David Nakamura (@DavidNakamura) May 4, 2016

Obama also said that some kids may not be affected by the drinking water.

Obama takes a sip, says filtered #Flint water is safe for residents 6+ yrs old. #FlintWaterCrisis http://pic.twitter.com/kD2UkPjBZn

— devindwyer (@devindwyer) May 4, 2016

What happens next? Well, since we doubt that this demonstration that local “filtered” water is safe will do much to change the local population’s opinion about the regular water, Obama’s demonstration may have been for nothing. As for the comparison with comparable Japanese confirmations that all is well, we do recall that one of the officials did end up having cancer.

Then again, since by his own admission, Obama’s drinking water had been filtered in advance, the risk of the lame duck president developing brain damage is slim to none.

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Via HardAssetsAlliance.com,

I was sure I misread the title, because everyone instinctively knows this policy is a bad idea… right?

But I didn’t misread it. And it was far from the only article in support of it.

The title was “Get Ready to be Showered by Helicopter Money.” And the voices behind this policy are growing.

Free money to your bank account

The idea is relatively simple: give people money… watch them spend it to stimulate the economy. This kind of behavior modification is usually done through tax cuts or spending programs.

Helicopter money, however, would take it a step further and deposit money directly into people’s bank accounts. What’s a better way to spur spending? Inject funds straight into the economy instead of trying to influence bond yields or sentiment.

Consumption makes up 70% of the US economy. So increased spending would no doubt boost the economy, including wages and jobs.

Sign me up!

Here are a few investors who recently got on board with the idea or think it’s likely…

• Economists at Citigroup, HSBC Holdings, and Commerzbank AG all published reports on the topic in March.

• Well-known hedge fund manager Ray Dalio sees potential in the idea: “Governments will eventually have to resort to policies that encourage spending.”

• European Central Bank President Mario Draghi called it a “very interesting concept.”

• When asked, European Central Bank chief economist Peter Praet refused to rule it out. “All central banks can do it.”

• Economist Nouriel Roubini: “It’s a logical option for any country struggling with deflation and slow growth, as Japan has and perhaps other countries some day may.”

• Gabriel Stein, Oxford Economics economist: “… the topic is receiving considerably more attention. The likelihood is reasonably high of some form being implemented somewhere.”

• Jonathan Loynes of Capital Economics on the idea of helicopter money: “The clear lesson of recent years has been that seemingly unimaginable policy measures previously confined to theory or history books can become reality if extraordinary economic circumstances persist for long enough.”

• Richard Clarida, Columbia University economist, predicts: “We will see a variant of helicopter money (perhaps thinly disguised) in the next 10 years, if not the next five.”

Potential problems

Let’s be honest, free money sounds great. And you might agree if you start daydreaming about what you’d buy with additional $1,000 or $5,000 in your bank account.

The truth is, nothing is free (not even “free” college or “free” healthcare). Here are some of the potential problems with helicopter money…

1. Inflation: Spraying money around would eventually lead to not just a rise in inflation, but potentially runaway inflation.

And once the inflation genie is out of the bottle, it’s hard to control. It took about a decade to rein it in after inflation hit double digits in the 1970s.

1. Bloated government debt: European Central Bank Governing Council member Jens Weidmann summed it up best: “Helicopter money isn’t manna falling from heaven, but would rip huge holes in central bank balance sheets.”

Global government debt levels are already high, which limits the options central bankers and politicians have at their disposal. Depositing money into bank accounts would worsen this problem.

1. Damage to central bank credibility: This is a big reason gold is rising now: distrust in what the Fed and other central banks can realistically do to combat slow growth.

Make no mistake; helicopter money is a drastic step, and everybody knows it. There would be a reaction by investors. Gold, for one, would continue to rise.

1. Lack of spending: You can give people money, but what if they don’t spend it like you intended? The policy could backfire if households sit on the funds.

Remember the great closing line from the movie, Too Big to Fail? Hank Paulsen, played by William Hurt, said “They'll use [the money] the way we want… won't they?”

1. The law: The ECB is prohibited from financing states directly. And the Fed is limited in what assets it can buy.

Of course, governments can change laws, but this could open the floodgates; what other laws will people want changed, especially if things spin out of control?

The big question

This policy will naturally raise a lot of questions, but you have to start with this one:

? Why resort to such a drastic policy when we’re told the economy is stable, improving, or even strong?

Bank of America recently said there had been 637 rate cuts and $12.3 trillion spent on assets around the world since 2008. They also estimated that 489 million people now live in countries where rates are negative.

With so much government stimulus and intervention, one could logically conclude that we hardly need to reach further down the ladder. Even a glass-half-full kind of person has to somehow reconcile the constant message that the economy is strong with the drastic actions central bankers continue to take.

The growing message instead seems to be that central planners need to head even deeper into uncharted territory.

And one of those “uncharted” ways could be to shower people with free money.

Things will turn ugly

Helicopter money won’t solve the big problems and will likely make things worse.

I like how HSBC senior economic adviser Stephen King put it: “The helicopter option is simple, easily implemented and, for some, offers the closest thing to a free lunch. But if this sounds too good to be true, that’s because it is.”

But it doesn’t matter what you and I think, because politicians and central bankers will do whatever they think is necessary, regardless of how asinine the “solution” may be.

All you can do is protect yourself.

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As a result of the dramatic surge in the S&P500 from its February lows, which erased the worst ever start to a year, and nearly regained the all time highs in the US stock market on a combination of a central bank scramble to reflate, the “Shanghai Accord”, and the most violent short squeeze in history, coupled with a historic credit injection by China which as we first reported amounted to a record $1 trillion in just the first three months of the year…

 

… economists have shelved discussions about the threat of a US recession.

That is a mistake.

According to Citi, the Q1 2016 stabilization in Chinese, EM and global growth looks fragile and is likely to be temporary. In other words, nothing has been fixed. In fact, Citi goes on to say precisely that:

In particular, none of the structural headwinds that seem to have plagued the global economy in recent years (a mix of excessive indebtedness, deteriorating demographics, rising political uncertainty as well as the end of the China growth miracle and the commodity supercycle) have been resolved.

Looking forward, these are the four key risks that keep Citi up at night “in the near term.”

• The Chinese stabilization could be even more short-lived than we currently expect. As noted above, the duration of China’s old-style investment-led fiscal stimulus and credit binge may prove rather short, as Chinese policymakers pivot back and forth between supporting growth and supporting reform and rebalancing. In the light of the evident imbalances and excesses in the Chinese economy, the Chinese stimulus may also prove to be less effective in sustaining aggregate demand – even in the short run – than hoped for.
• One contributor to the potential stabilization in China’s and EM activity has been the weaker US dollar and receding expectations of a US rate hike. But these may well prove temporary. In particular, financial markets probably currently underprice the risk of Fed rate hikes over the next year or two (our US team currently expects one more hike in 2016, probably in September, but the next hike could also happen in June or, more likely, July). It remains to be seen whether EM financial conditions and the tentative stabilization in EM economic activity would prove resilient to renewed Fed tightening and dollar strength.
• A US downturn could threaten. The recent weakness in the US data, continued cautious behavior of US consumers, and the lack of “animal spirits” to raise investment spending leave questions as to whether there may be further economic weakness to come.
• Political risks in Europe are high and rising. The UK’s upcoming EU referendum (June 23) remains a key uncertainty for the coming months and we believe Brexit, if it happens, would be a major negative in economic and political terms for the UK and EU as a whole. We still put the probability that the UK votes to leave the EU at 30-40% – i.e. not our base case but by no means a trivial risk – but there are some reasons to think that the risk may be even higher. And Brexit is by no means the only source of political uncertainty and risk in Europe, with new elections due in Spain, high support for non-mainstream parties in many countries including Austria, France, Italy, the Netherlands, Sweden, Denmark, Hungary, Poland and Slovakia, and rising non-mainstream support even in Germany.

But what may be the biggest concern to Citi is that the credibility – and ability – of central banks, to effectively prop up the system is now openly in question:

The recent IMF-World Bank Spring Meetings made clear that the perceived reduction in global recession risk was greeted with a major sigh of relief from policymakers around the world. This is in at least part because it may not be straightforward to come up with an appropriate policy response in the event of a major downturn. Of course, there are still various options for stimulus in most economies. On the monetary side, the ECB highlighted that a pivot towards more domestically-oriented easing (including credit easing implemented through purchases of corporate bonds and subsidized (negative interest rate) loans to banks) is possible; the BoJ has shown that purchases of equity ETFs and REITs are among the tools of policymakers; and for both the BoJ and ECB, there is probably some more room to lower policy rates (including offering (more) negative interest rates on loans to banks) and to increase purchases of public assets. Yet it is almost universally acknowledged that the incremental boost to demand from monetary stimulus is diminishing and the side-effects (including political side-effects) may be rising.

 

If monetary options are limited, the obvious alternatives would be stronger fiscal or quasi-fiscal support or, indeed, the much-heralded ‘three-pronged strategy’ of combining monetary and fiscal stimulus with structural reforms. But even though, at least in the advanced economies, fiscal policy is slowly and gradually turning less procyclical and more supportive of economic activity, hurdles (legal, ideological, political or reflecting (lack of) fiscal space) to timely and sizable fiscal stimulus remain relatively high in most economies. Meanwhile, prospects of structural reform remain rather limited across both DMs and EMs. The limited likelihood of effective policy stimulus in the event of a downturn therefore adds to the potential fragility of the recent more positive developments in financial markets and real activity, if sentiment (business, consumer or financial market) were to turn more pessimistic again and /or if one or more of the adverse contingencies listed above were to materialize.

Which is ironic, because now that asset prices and thus the market is the only real mandate of the Fed, the moment there is an uncontrolled drop in the S&P500 or any other global market, is when the global central bank put will finally be put to the test, and if Citi is right, it will be exposed as the bluff it was all along.

Which incidentally explains why the SF Fed’s John Williams just two days ago explained what he thinks may be the biggest systemic risk factor: dropping asset prices. From Reuters:

San Francisco Federal Reserve President John Williams reiterated Monday his view that the U.S. economy is ready for higher interest rates, but flagged the risk of broad-based declines in asset prices as a result. 

 

Speaking at a panel on systemic risk at the Milken Institute Global Conference, Williams said the biggest systemic financial risk currently is the possibility that “broad sets of assets are going to see big movements downward” as interest rates rise. “That’s an area that I think is a potential risk.”

Ignoring the insanity that the Fed now has to warn that a market selloff is a “systemic risk“, it also exposes not only the weakest link in the modern financial system, namely artificially inflated prices, but by definition confirms that just like in China where having a bearish opinion is now officially prohibited, it reveals that the market is only where it is due to constant and unrelenting central bank intervention, something “conspiracy theory” fringe blogs have been saying for nearly a decade.

For those wondering how to trade this, we unfortunately have no advice: because if one is buying puts on expectations of the Fed losing control, we have bad news: the market will simply be shut down and all capital flows will be halted indefinitely before true price discovery is allowed. As such those hoping to be paid when all central bank control is lost will be disappointed. It is also why none other than JPM warned last Thursday that the best option is not to bet on financial assets, either long or short, but to move into physical assets among which, JPMorgan listed, gold.

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The dollar's gyrations remain a key source of inspiration for traders with the fundamental focus continuing to switch between falling US and rising OPEC production, according to Saxo Bank's Ole Hanson.

The nervousness and negative price action seen this week was triggered by a change in focus from falling US production towards the rising supply from others, especially within OPEC. Having seen calendar 2017 almost hit $50 last week the realisation that further upside may be hard to achieve may has helped trigger increased demand for protection.

The speculative net-long remains very elevated so just a small change in the fundamental or technical outlook can trigger increased demand for hedging.

This has been reflected in the options skew on WTI crude which during the past week has seen increased demand for put options.

The skew or “smile” shows that the cost of out-the-money puts has risen by close to 5% this week while OTM calls have risen by less than 2%

Furthermore, as OilPrice.com's Rakesh Upadhyay notes, the 70% rise in crude oil prices from the lows of $27.1 per barrel to a high of above $46/b in a matter of three months is being driven by speculative activity—make no mistake about it. The speculators have latched on to every bit of rumour and news to bid prices higher, and this has nothing to do with the real fundamentals.

However, speculation can boost prices only to a certain extent in the short-term. After this, the fundamentals take over. The extent of speculation is enormous, though the daily production of oil in the U.S. is around 9 million b/d, the WTI crude oil contract trades more than 100 times the produced quantity, as highlighted in this January 2016 post.

The trading volume is generated by the algo traders, day traders, and scalpers who are in and out of their positions many times a day. Due to their enormous volume, they set the direction of prices in the short-term.

However, these traders are neither involved in the production nor do they take physical delivery of oil; they are usually active only in the near-term contracts until expiry; after which the users of oil take deliveries.

The oil producers have used the sharp rise to hedge part of their production for 2016 and 2017 as reported by The Wall Street Journal.

(Click to enlarge)

However, Citi Research points out that the oil producers have hedged only 36 percent of their estimated production for 2016, compared to 50 percent in the previous years.

If prices creep up further, the producers will not only hedge more, they are likely to increase production to mend their balance sheet.

Pioneer Natural Resources has hedged 50 percent of its expected 2017 output and has conveyed its intention to add five to ten horizontal drilling rigs if prices recover to $50/b, with a positive outlook for oil fundamentals. Earlier on, too many U.S. shale oil drillers had indicated that they will be back at around $50/b levels.

Though the bulls have latched on to the largest U.S. rig count drop in the past six weeks, their bullishness might be short-lived because if prices reach above $50/b, we might see an increase in the oil rig count, reversing the current trend.

The short-term trend changed with the idea of a production freeze by Russia and OPEC, but the Doha meeting turned out to be a non-event.

The chart below by Yardeni Research, a provider of independent investment and economics research, shows that in 2016, the oil inventories continue to rise, confirming that the supply glut continues.

(Click to enlarge)

The U.S. Energy Information Administration’s (EIA) STEO report expects the supply glut to reduce in the second half of the year; however, if prices remain high, production might increase adding to the supply glut.

Though Nigeria, Kuwait, and Venezuela’s production has been hit hard due to various reasons, OPEC’s production of 32.64 million b/d is very close to its highest level of 32.65 million b/d recorded in January 2016, according to Reuters survey records since 1997.

"The market is massively oversupplied," said Eugen Weinberg, analyst at Commerzbank in Frankfurt. "This rally doesn't have strong legs," reports Reuters.

There isn’t much by way of fundamentals to rely upon for the rally to continue. Closer to $50/b, additional supply will start trickling in and buyers will be wary to buy at higher prices. With no excuses at hand, the speculators will find it difficult to prop prices higher.

The short-term speculative pop in crude is about to end and the long-term fundamentals will take over. Prices should drop closer to $36 to $38/b in the near future.

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One year ago, SunEdison was the darling of the hedge fund world. It is now bankrupt. Moments ago, Jim Chanos revealed that (in addition to Tesla) he is also short Elon Musk’s SolarCity, sending the stock sliding.

But what is the bear case?

Well, courtesy of Axiom’s Gordon Johnson, here are some very specific reasons why Chanos may once again have a home run on his “short” hands. Below is his “big picture” summary:

SOLARCITY CORP. (SCTY – $26.45 – SELL)

 

Is The Entire Sell-Side Incorrectly Giving SCTY Credit For Cash It Can’t Access?

 

The Good, the Bad, & the Ugly. In a widely anticipated move (evidenced by the recent outperformance of SCTY’s shrs), yesterday SCTY announced its first-ever cash equity deal w/ John Hancock Financial (“JHF”). Under the terms of the deal, SCTY will sell 95% of the cash flows generated from a portfolio of 201MW of residential & commercial solar projects to JHF over the next 20yrs.

 

The Good: in return for the cash flows, SCTY will receive $227mn in upfront equity, while retaining a 5% minority interest over 20yrs; including tax equity investments + upfront rebates/prepayments, this transaction will raise $3.00/W in total financing (or ~$603mn), & reflects a blend of $2.35/W for commercial projects & $3.24/W for residential projects; the IRR is ~8.2%; the majority of the installations were completed in ’15; the projects are spread over 18 states, w/ no single state comprising >35% of the portfolio; & the avg. FICO score for the residential customers is 744.

 

The Bad: when looking at just the cash equity proceeds from this deal ($227mn) – while we recognize an additional $376mn in cash, ~$346mn of which is tax-equity (“TE”), has already been received, while, technically, TE is available for general corp. purposes, given it’s largely been spent to offset the CAPEX of the systems themselves (meaning, in reality, it is not available), we feel the relevant metric to analyze is the cash equity received, or the cash available for new project investment/debt retirement – adjusting for SCTY’s 5% ownership, a more normalized ?50% mix of SREC’s from CA, and then applying these metrics to SCTY’s existing installed base of 1.67GW (i.e., 1.8GW of cum. deployed GWs – 177MW of MyPower loans [MyPower loans have no tax equity]), adjusted for debt, the Silevo earn out, unrestricted cash, the book value of MyPower, the full renewal value, & a 35% tax rate, we derive a fair value for SCTY’s PowerCo of just $0.71/shr (Ex. 6).

 

The Ugly: $2.71/W in costs (Ex. 7) – $1.38/W in tax equity (Ex. 8) – $0.07/W in rebates/repayments (Ex. 9) = $1.25/W in funding needs; yet cash equity proceeds from JHF were just $1.18/W, meaning SCTY sold at a loss. Caveat emptor.

 

Dark Clouds Ahead? We believe a mild bookings trend borne out of SCTY’s decision to leave NV, & withdraw MyPower, will compel an annual guidance cut when the company reports earnings next week.

* * *

The key here is… for all intents and purposes, SCTY got an investment from John Hancock Financial (“JHF”) – it was not a project sale. SCTY retained ownership but, sold off 95% of their cash flows. In our view, what Consensus appears to have missed in all of this, in addition to the fact that the tax-equity cash flows are not available for immediate redeployment for growth/debt pay down, is that SCTY sold the cash flows, but kept the debt (this is not sustainable). While SCTY could indeed use the proceeds from the sale to reduce their growing debt obligation, they are likely going to use them to grow their installed base. 

 

Stepping back, we ask our readers… would you do this? That is, would you ramp up leverage, in return for growth, at the expense of negative free cash flows? We don’t think so as it is value destructive (no matter what SCTY says), and is being done, we believe, to show investors growth at any cost (and, as this deal shows, it is costing dearly). As this becomes more broadly understood, we expect the shares to come under intense pressure.

A few hours later, they already are under “intense pressure” courtesy of none other than Jim Chanos.

And the full report:

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Following the denial in February that this action is in any way about reducing cash, The ECB has made its decision on the EUR500 Bill:

• *ECB ENDS PRODUCTION AND ISSUANCE OF €500 BANKNOTE
• *ECB SAYS ISSUANCE OF EU500 NOTE TO STOP AROUND THE END OF 2018
• *ECB SAYS OTHER EURO BANKNOTES WILL STAY IN PLACE
• *ECB: EU500 CAN BE EXCHANGED AT CEN BANKS FOR UNLIMITED TIME

And just like that the second highest denominated European bank note in circulation (after the CHF1000 Bill) is dead…

And so now, everyone rushes into the CHF 1000 note.

 

So what, big deal, eliminate it. The people will still have 5, 10, 20, 50, 100 and 200 euro bills right.

As we wrote previously, the answer is not that simple at all. Recall that the €500 note is the second highest currency denomination in G10, after the CHF1,000 note. More importantly, the total value of €500 notes in circulation amounts to €306.8bn and has been rising as shown in this BofA chart:

 

Furthermore, as a share of the value of total euros in circulation, the €500 note is the second-highest, after the €50 note.

 

This is what we said in February:

 

 

In other words, if overnight the €307 billion worth of €500 bills were eliminated, the notional value of the entire amount of European physical currency in circulation would decline by 30% to €700 billion!

 

And there you have it: while it may not be banning all European cash outright, we are confident the ECB would be delighted if one third of it was to start, while pretending to be fighting financial crime, terrorism, corruption and drug dealers. 

 

Of course, what Europe would be truly doing is setting the scene for ever more aggressive NIRP, and by removing the highest denomination bank notes, it would make evading negative that much more difficult and costly (albeit would certainly favor gold).

That's not all: as Bank of America pointed out, abolishing the €500 note may even end up even weakening the European currency:

 

 

… we would expect that abolishing a note that represents almost 30% of the total Euros in circulation would be negative for the currency, keeping everything else constant. The share of the €500 note in the total value of Euros in circulation has been falling since 2009 and this has coincided with a weakening Euro in real effective terms. This is not evidence of causality, but we should not ignore it.

 

If we are right, the Euro will weaken, primarily against the USD and the CHF. The USD is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the Euro as a store of value. However, the CHF could also benefit, having the largest note denomination in G10 economies. Indeed, the CHF1000 note is already very popular, representing more than 60% of the CHF  notes in circulation, unless the SNB follows the example of the ECB and also abolishes the CHF1000 note.

BofA is right, unless of course, in this global race to the bottom where every central bank tit has other central bank tats as a direct response, first the SNB "scraps" the CHF1000 bill, and then the Federal Reserve follows suit and listens to Harvard "scholar" and former Standard Chartered CEO Peter Sands who just last week said the US should ban the $100 note as it would "deter tax evasion, financial crime, terrorism and corruption."

 

Go ahead and cut, then: after all who really needs the Benjamins, right? Well, here's the thing:

As the Treasury chart above shows, $100 bills account for for $1.08 trillion of the $1.38 trillion total in circulation. So should the Fed react to the ECB's "scrapping" of the €500 bill, which accounts for 30% of the value of currency in circulation, then the Fed would respond in kind, by eliminating 78% of all paper currency in circulation by value.

Not a bad way to launch a global ban on paper currency ahead of a global NIRP regime, and all, of course, in the name of fighting "tax evasion, financial crime, terrorism and corruption."

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