Tag: news

We first brought the world's attention to Noble Group in 2015, as commodity markets crashed and what was Asia's largest commodity trader faced near-bankrutpcy as trading partners lost faith, bonds were dumped, and CDS protection was bid. In the months since, panic subsided and everything  – as it always seems to have been – was fine… until last week!!

Which brings us to the recent price action in Silver (as well as various other commodities). As The Macro Tourist's Kevin Muir asks (and answers) –

Was Noble The Big Silver Seller?

I don’t want to goocher it, but it looks like I might have fluked into picking up some silver last week near the bottom (Wallace prepares to buy some silver). That post is just proof that some of us were lucky enough to be born smart, while others, were smart enough to be born lucky. I count myself firmly in the latter camp, just without the foresight to chose that group. But rather than focusing on trying to time the short term squiggles, I would like to discuss the cause of the absolute drubbing the commodity markets took over the past month.

The easiest, and most obvious, explanation centers around the rise in US dollar real yields. A month ago, the US 5 year real yield (as measured by the TIPs market) was almost negative 30 basis points. Last week, at its worst, the real yield had pushed up to just a hair under positive 20 basis points. That’s almost 50 basis points of real tightening.

This occurred during a period of US economic underperformance versus expectations.

I am unsure if the poor economic performance was coincidental or causal, but it doesn’t really matter. Higher real rates, combined with an economy rolling over, are a poor environment for commodities.

The cause of the rise in real rates is more difficult to ascertain (whether it is an overly tight Fed, or Chinese withdrawal of liquidity, is up in the air), but its effect on our precious metal friends cannot be argued. Precious metals hate rising real yields. In fact, given the backup in real yields, gold actually hung in there pretty well.

But, silver traded tick for tick with the US 5 year real yield.

It could be there is nothing more to this story. Real rates rose (for whatever reason), and commodities sold off. Nothing more, nothing less.

Yet when I look at the silver chart, it seems less than random. For the period of mid-April until last week, the trading action consisted of a persistent, steady decline.

The selling was relentless, and much too uniformed. Although I know fundamentals were helping the decline, I contend there might be more lurking behind the scenes.

I am late to this news, but over the past couple of weeks, Hong Kong based commodity conglomerate, Noble Group, has gotten themselves into some serious trouble. Actually, serious trouble is probably understating the situation. It’s more like grave danger (like there is any other kind?)

First up, let’s have a look at the equity price of Noble Group:

Strangely, the decline in Noble’s stock price started the same time as silver, almost to the day.

And lest you think Noble is simply experiencing a share price decline that might be recouped, have a look at their most liquid bond issue:

At the beginning of May, this bond was still trading at slightly under par. Over the past week, it has declined to just over 50 cents on the dollar.

The bond market has abandoned Noble. Something’s wrong. Really, really, wrong.

When I was researching this situation, I stumbled upon this great blog from Iceberg Research. In their research, they outline the short thesis for Noble. I am not judging the merits of their case, but I trust the bond market. And the bond market is screaming that Noble is in trouble.

And what do you trading companies do when they are in trouble? They sell stuff to get liquidity. Inevitably they don’t sell the stuff they should, they sell the stuff they can. It’s a tale as old as time. We saw it with Long Term Capital Management, with the Bear Stearns real estate credit hedge funds, and even with Lehman.

In Iceberg’s research, they outline a whole host of illiquid commodity assets they claim Noble is marking too high. If this analysis is correct, then these assets will be the last thing Noble pitches. Instead, liquid commodities, like say, silver, will be given the boot…

I could be whistling in the wind, but I wonder if silver’s decline over the past month has been a desperate attempt to shore up some liquidity at Noble. Although we probably will never know for sure, I take solace in the fact that if I am correct, then most likely Noble will have no more silver to sell. If the grim reaper of bankruptcy comes for Noble in the coming weeks, then all the good positions will have most likely already been sold. Don’t get too bearish on any Noble Group bad news, it’s most likely already in the price of all but the most illiquid commodities.

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After proclaiming herself "an activist citizen and part of the resistance," and by definition – absolutely not part of the establishment? – Hillary Clinton has unveiled her latest fund-raising vehicle – Onward Together to "champion the vision that earned 66 million votes in the last election."

The group, “Onward Together,” will work “to build a brighter future for generations to come by supporting groups that encourage people to organize and run for office," according to a statement from Hillary Clinton.

As a reminder, in early May, Clinton identified herself as part of “the resistance.”

“I can’t be anything other than who I am,” Clinton said at a Women for Women International event.

 

“And I spent decades learning about what it would take to move our country forward — including people who clearly didn’t vote for me — to try to make sure we dealt with a lot of these hard issues that are right around the corner like robotics and artificial intelligence and things that are really going to be upending the economy for the vast majority of Americans, to say nothing of the rest of the world.”

 

“So I’m now back to being an activist citizen and part of the resistance.”

The Mission – as defined by her website – is as follows (emphasis added):

Onward Together is dedicated to advancing the vision that earned nearly 66 million votes in the last election. By encouraging people to organize, get involved, and run for office, Onward Together will advance progressive values and work to build a brighter future for generations to come.

 

Citizen engagement at every level is central to a strong and vibrant democracy. In recent months, we've seen what's possible when people come together to resist bullying, hate, falsehoods, and divisiveness, and stand up for a fairer, more inclusive America.

 

From the Women's March to airports where communities are welcoming immigrants and refugees to town hall meetings in every community, Americans are speaking up and speaking out like never before.

 

The challenges we face as a country are real. But there's no telling what we can achieve if we approach the fights ahead with the passion and determination we feel today, and bring that energy into 2017, 2018, 2020, and beyond.

 

Onward!

Onward Together will start by supporting five groups, including Swing Left, Emerge America, Color of Change, Indivisible and Run for Something.

In some cases will provide direct funding to the organizations to help grow their audiences. The funding – it appears – will come from you America and yuour kind donations…

“In recent months, we’ve seen what’s possible when people stand up for a fairer, big-hearted, more inclusive America,”

 

“Chip in today to help Onward Together support the people and organizations championing the vision that earned 66 million votes in the last election.”

“Resist, insist, persist, enlist.” – Hillary Rodham Clinton

The resistance is building.

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Hedge funds dumped almost $6 billion notional in gold futures last week.

That is the largest drop in hedge fund longs in the history of CFTC data.. and the precious metal has stabilized since.

While this is the largest drop on record, there were three other weeks when this approximate selling level was achieved and here is what happened next… 3/6/07 (+9.6%), 3/6/12 (+3.25%), 5/24/16 (+14.6%).

One wonders what happens next?

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Stability breeds instability – this was economist Hyman Minsky‘s lasting contribution to the craft.  The Minsky Moment , popularized during the 07-09 US housing crisis, basically suggests breeding animal spirits too long creates systemic problems. Essentially, the ongoing rises in asset prices creates the sense of a new paradigm, that the elevated activity was safe, and home prices couldn’t fall.. that didn't end well.

And, as Mohamed El-Erian writes for Bloomberg, excessive stability breeds instability down the road.

The smoother the road, the faster people are likely to drive. The faster they drive, the more excited they are about getting to their destination in good, if not record time; but, also, the greater the risk of an accident that could also harm other drivers, including those driving slower and more carefully.

That is an appropriate analogy for the way unusually low financial volatility influences positioning, asset allocation and market prospects. And it holds for both traders and investors.

The lower the market volatility, the less likely a trader is to be “stopped out” of a position by short-term price fluctuations. Under such circumstances, traders are enticed to put on on bigger positions and assume greater risks.

What is true for one trader is often true for firms as a whole. Moreover, the approach is often underpinned by formal volatility-driven models such as VAR, or value at risk, that give the appearance of structural robustness.

Patient long-term investors can also be influenced by unusually low volatility, whether they know it or not. Expected volatility is among the three major inputs that drive asset-allocation models, including the “policy portfolio” optimization approach used by quite a few foundations and endowments (the other two variables being expected returns and expected correlation). As the specifications of such expectations are often overly influenced by observations from recent history, the lower the volatility of an asset class, the more the optimizer will allocate funds to it.

All this is to say that the recent decline in both implied and actual measures of volatility, including a VIX that recently touched levels not seen since 1993, is likely to encourage even greater risk taking both tactically and strategically, including bigger allocations to stocks, high yield bonds and emerging market assets. And both, at least in the short-term, will contribute to damping market volatility further.

None of this would be particularly remarkable if the decline in volatility was not coinciding with notable fluidity in the global economy on account of economic, financial, geopolitical, institutional and political factors.

From the North Korean nuclear threat and the rise of anti-establishment movements to allegations of Russian meddling in elections and yet-to-be properly explained behaviors of some economic variables (such as productivity, wages and inflation), among many other developments, the disconnect with the exceptionally low levels of volatility is attracting greater attention, though seemingly few portfolio adjustments as of now.

What makes the situation even more intriguing is that the main policy instrument that has been used in recent years to repress financial volatility, unconventional monetary policy, is itself in transition. The U.S. Federal Reserve has stopped its quantitative easing program and now seems intent on normalizing interest rates, including at least two possible hikes in the remainder of 2017. It is also considering a program for an outright reduction in the size of its balance sheet. Meanwhile, the long-awaited economic strengthening in Europe is placing pressure on the European Central Bank to be less accommodating, raising interesting questions about the sequence of its QE tapering, forward policy guidance and interest rate hikes. The Bank of England is seeing inflation rise to its highest level in some years.

Left unattended, all this could lead to some unpleasant market outcomes — whose consequences would potentially impact excessive risk takers, with negative spillovers on  those who have been more careful. Fortunately, there is an orderly economic and financial way to reconcile the disconnects, and without derailing the gradual normalization of monetary policy.

As detailed in earlier articles, this process involves politicians enabling other policy-making entities, which have tools better suited to the challenges at hand, to deliver on their economic governance responsibilities. By achieving higher and more inclusive growth, such an overdue policy response would enhance economic prospects, allow for genuine financial stability, lessen the political pressures on economic institutions (particularly central banks) and help render national politics less toxic.

But if the needed policy response continues to lag, this period of unusual market calm would end up as another data point in support of the “instability hypothesis” of the U.S. economist Hyman Minsky – that is, the simple yet powerful idea that excessive stability breeds unsettling instability down the road.

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Multiple buildings are on fire after a Learjet 35 private corporate jet crashed in New Jersey on Monday afternoon. According to ABC7NY and @NYCAviation, the crash happened in an industrial area on Kero Road in Carlstadt (in the vicinity of the Meadowlands Stadium) as the plane was on approach to Teterboro Airport’s runway 1.

Breaking: Reports coming in of a Lear 35 crashing while on approach to Teterboro Airport’s runway 1. Possibly in the Meadowlands area.

— NYCAviation (@NYCAviation) May 15, 2017

Police confirmed that multiple buildings are on fire, but no other details have been released.

Plane crash @NBCNewYork @ABC7 http://pic.twitter.com/lVIdU2lFfK

— Godwin (@GodwinClassic33) May 15, 2017

A witness told Eyewitness News that it appeared the plane was trying to land at nearby Teterboro Airport.

While it is unclear whose private jet this was, and whether there were any passengers on board, acording to FlightAware, a LearJet-35 was scheduled to land at Teterboro, arriving from Philadelphia.

Also according to Flighyaware, that particular plane – which may not be involved in the crash – appears to be owned by by A&C BIG SKY AVIATION LLC, out of Billings, MT.

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Investors piled into stocks today after the biggest global cyberattack in history struck over 100 nations, Chinese economic data disappointed and fell, America faces a "constitutional crisis" if the media is to be believed, and US economic data dumped… Only one clip is needed…

 

So Chinese data dumped, European data disappointed, and US data was dismal… sending the global macro surprise index to its lowest since November…

 

All major stock indices closed green…the entire day's gains were in the overnight as stock went nowhere from the opening gap…

 

With Energy and Financials best (though the former rolled over hard as oil did)…

 

Interestingly VIX was up early, but as the S&P desperately clung to 2,400, VIX was clubbed back lower…

 

S&P closed above 2,400 for the first time ever, as closed below 11 for the 16th day in a row

 

Yet another new record streak…

 

The last time the US equity market had a longer stretch of calmness was February 1969.

 

 

Of course oil was the big news of the day as WTI managed a mere 2% surge on the back of chatter of a Russia/Saudi agreement to extend the production cuts… by the end of the day, sellers were back as the machines ran the stops… RBOB closed back below 1.60 and WTI never made it to $50…

 

And that helped provide cover for desperate stock buyers…

 

 

The Dollar Index extended its losses after CPI missed on Friday…

 

Treasury yields rose modestly on the day with 30Y back marginally above 3.00%

 

Silver is now up 4 days in a row (after falling for 16 straight) and gold is also up 4 in a row – back above its 100dma..

 

Silver has outperformed gold for the last few days…

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Authored by David Stockman via The Daily Reckoning blog,

There’s just no other way to say it: the market is insanely overvalued right now.

The so-called recovery has already lasted 96 months. It’s the longest recovery in history. It’s also the weakest. But you’d never know it from the stock market.

Right now the S&P is trading at something like 24 times trailing earnings. That is what I would call the nosebleed section of history. And it’s absolutely not justified by fundamental economics.

What the market is saying is we have reached the point of full employment forever. There will never be another recession or any kind of economic surprise or dislocation. There is no reason why the market should be even near today’s levels if markets were allowed to function normally.

The market is pricing itself for perfection for all of eternity.

Nonsense!

The fact is, the real economy apart from the canyons of Wall Street is in very poor shape. The Commerce Department recently reported that first quarter GDP growth came in at just 0.7%. The report also revealed the slowest first quarter for household spending since 2009.

Some economists call that “stall speed.” After 94 months of the weakest recovery in modern history, there is no other way to describe it.

Not exactly perfection.

We are at the end of a 20-year credit bubble that has basically inflated the world economy beyond any sustainable level. We’re now facing the day of reckoning in which we’re going to suffer from a huge deflation for years to come.

The global economy is in a place we’ve never been before. We have never experienced eight years of effectively zero money market rates, even during the lowest point of the Depression in the 1930s. And we’ve never had a credit bubble in the world economy anything close to what we have now.

In 20 years, central banks have taken their balance sheets from about $2 trillion in 1995 to $21 trillion today.

And the global economy is now buried under a $225 trillion mountain of debt, if you can imagine a number that large.

I recently came back from a 10-day trip to China and I can tell you that is the world’s greatest Ponzi scheme. It is going to collapse.

So put all of those things together and you have a market that’s waiting to roll over.

Bubbles are popping up in real estate again. We’re also seeing high levels of defaults in student loans and the auto industry.

And one subject I’ve been following lately is the collapse of the retail industry. I call it the “Retail Apocalypse.”

Even the Bureau of Labor Statistics (BLS) seems to have gotten the word about the horrific condition of the malls. During the last few months, it has reported a 60,000 decline in the seasonally maladjusted job count. And a 758,000 drop in the actual count since the December holiday peak.

By the way, that compares to only a 644,000 drop over December-March during the prior year.

Even the Wall Street propaganda machine admits:

“… retailers continue to struggle and dead malls pile up in characterless suburbs across America.”

The plunge in department store sales — which comprise the anchor and driver of 70% of mall traffic — have not lessened in the slightest. As of the most recent reading, the monthly sales rate was down 30% from the pre-crisis peak.

That’s in nominal dollars. In real terms, department store sales have fallen more than 50% since the early years of this century.

Moreover, what is happening is not merely cyclical in the traditional sense. Debt-encumbered American consumers are tapped-out. They are dropping, not shopping, because this entire “recovery” has been wasted. That is, consumers can’t spend energetically because there has been no significant deleveraging since the 2008 crisis.

That in turn means the Keynesian assumption of Washington’s economic policy has again been refuted. That is the belief that consumer spending is the engine of prosperity.

In fact, notwithstanding a 5X gain in the Fed’s balance sheet — from $900 billion on the eve of the Lehman meltdown to $4.5 trillion today — our Keynesian central bankers simply could not cause consumers to borrow and spend their way to prosperity.

That’s because, as I’ve pointed out many times, they are impaled on Peak Debt.

The only significant retail spending growth since the crisis has occurred among the top 20% of households. But history proves beyond a shadow of doubt that when the stock market collapses, the credit cards will go back into the wallet.

In fact, there is some pretty stunning evidence that this is already happening — the tail end of the Trump-O-Mania rally notwithstanding. The best data on what consumers are actually doing is provided not by the government statistical mills, but by Bank of America from its massive base of credit and debit cards.

In February, sales at department stores plunged 15% versus the prior year. That’s the largest decline ever recorded.

In a word, the retail mall sector is facing harsh headwinds and the worst of both worlds. That is, flagging demand and immense over-capacity.

It now appears that nearly 150 million of retail square footage could close during 2017 — an all-time record.

So in a desperate effort to cope, retailers everywhere are slashing prices, increasing merchandising and promotion expenses in an attempt to fill empty stores with service and entertainment venues.

This is an unfolding disaster that hasn’t gotten anywhere near the attention it deserves.

On a broader scale, markets are about to collide with reality.

The S&P could easily drop 40% or more to 1,600 or 1,300 once the fantasy ends. When this crazy notion that there is going to be some Trump fiscal stimulus ends, it will it will put the illusion to rest once and for all.

The stimulus is not going to happen. Congress can’t pass a tax cut that large without a budget resolution that incorporates $10 trillion or $15 trillion in debt over the next decade. It’s just not going to pass Congress.

And I think the post-election “reflation trade” is the greatest sucker’s rally we have ever seen.

There will be no bid for stocks once the panic sets in. They’re going to hit an air pocket. The S&P 500 is going to drop by hundreds and hundreds of points as we drift into this unexpected crisis.

The main thing is get out of the markets. They’re unstable. I don’t believe there’s any credible reason to own stock at this point in the game. The entire market is simply way overvalued. They may squeak out another two or three percent on the upside. But stocks are facing a 30% or 40% down.

In other words, the risk/reward quotient is horrible. The bottom line is that all this is coming to a halt.

The Fed has finally run out of dry powder. It’s getting out of the bond buying business. It’s even talking about initiating the shrinkage of its balance sheet. The central banks are finally getting to the end of the road.

There isn’t going to be any more money printing, and that is the harsh  reality the markets must face.

Head for the exits now, while you still can!

 

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Legendary value investing hedge fund, ValueAct made financial headlines over the past three months for all the wrong reasons. First, in late February, its chief executive Jeff Ubben told Reuters said that his firm had been taking money out of the capital markets as valuations have become overextended, leaving it with $3 billion in cash.

“I really feel that the large-cap activist plays are very treacherous with high PEs (price-to-earnings) and not a lot of growth,” Ubben said, speaking at the Reuters “Future of Shareholder Activism” event in New York. He told Reuters that he was not focusing on any particular sector but instead looking for bets on idiosyncratic, mid-sized companies such as spin-offs and “weird” corporate structures.

Then, one month ago, CNBC reported that Ubben was returning $1.25 billion to investors because he believed the market to be overvalued and there were no attractive investment opportunities.

Ubben writes that “the broader market context is explicit to us. The S&P 500’s median P/E ratio is 18 times. For most high quality companies we follow, it is much higher. These valuations can only be justified by assuming cyclically high corporate margins will persist, a certainty of lower corporate tax rates and a risk-free rate that stays near all-time lows. We are skeptical of all of the above.”

 

As a result, the hedge fund will return $1.25 billion in capital to its limited partners starting on May 1. As in February, Ubben cited the higher-than-normal cash balances in the fund ranging from 10 percent to 29 percent since the end of 2015 versus the 5 percent average during the last decade.

In the third, and perhaps most notable headline yet, moments ago the FT reported that Ubben is stepping down as investment head at ValueAct, the fund which Ubben built into a $16 billion activist powerhouse, and would cede daily oversight of the fund’s portfolio to his protégé, Mason Morfit.

Mr Ubben will remain as chief executive but focus on finding new investments and serving on boards, according to a letter that ValueAct sent to its investors on Monday. Mr Morfit, a partner since he was 27 and currently president of the firm, will become chief investment officer in July.

Ubben explains that he had handpicked Mr Morfit as his replacement a decade ago.

“Why is it happening now? It’s because 10 years ago I told Mason, you’re going to be the portfolio manager, and when the clock struck midnight, he looked at me and pointed to his watch,” he said. “If you keep a jump ball in place on succession, it’s not a very fun environment. It was better for investment performance because you don’t have politics.”

As such, it appears that Ubben’s move is more a question of succession planning than throwing in the towel, as some of his famous peers have done in recent years.

As the hedge fund industry and its founders age, many are grappling with the question of who will succeed them. Only a handful of funds, such as Farallon Capital and Renaissance Technologies, have managed the transition successfully. Some have shut their funds to outside money and converted to a family office, while others have begun to plan for the next generation. Ray Dalio, at Bridgewater, announced in March he would relinquish his co-chief executive title, while Paul Singer, of Elliott Management, promoted Jon Pollock to co-chief executive alongside him in late 2015.

For those unfamiliar, here is some background on Ubben’s replacement at the iconic activist fund:

Mr Morfit was 25 years old and working as a research analyst at Credit Suisse in New York but looking to move to San Francisco when a friend introduced him to Mr Ubben in 2000. Worried that no one would hire him without an MBA, he spent the first four months working for free before Mr Ubben hired him. “It was the perfect mix of a guy with no degree and a guy with no assets,” he jokes. Now, he likens their relationship to “more of a buddy movie”.

 

* * *

Mr Morfit, ValueAct’s second employee, said he learnt on the fly from Mr Ubben, travelling around the country with him to meet different companies they were invested in or considering investing in, the two recalled. “It was this incredible apprenticeship,” Mr Morfit said. “I picked up his judgment through osmosis.” Mr Morfit served on his first corporate board for ValueAct at 29. He is currently on the board of Microsoft, where ValueAct’s pressure led to the ousting of Steve Ballmer as chief executive.

* * *

Mason Morfit has Martha Stewart’s bad judgment to thank for his elevation to heir apparent at ValueAct.

 

As Jeff Ubben recalls it, the day after the firm bought a 6 per cent stake in the Ms Stewart’s eponymous home goods company, federal agents were knocking on Ms Stewart’s door to question her over suspicious trading in ImClone shares. Two years later, with Ms Stewart on her way to prison for insider trading, Mr Ubben was spending all of his time working to turnround her company as its new chairman. Mr Morfit, left behind at the office, stepped up to lead the rest of ValueAct’s portfolio. That was when it became clear that Mr Morfit was “first among equals”, Mr Ubben says.

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