Legal Tender

From the Slope of Hope: When I was a young boy, growing up in the suburban splendor of Louisiana, I had a very pleasant middle-class childhood. Even at a young age, though, children are able to discern who is more “middle class” than others. My father was a manager at a large international company, and we lived in this house……….

0726-tim

My friend Steven Montgomery, however, was the “rich kid” on the block, because his father was the general manager at Audubon Ford, which was the big car dealership in town (yes, this is what constituted “rich” to us). Steven had a lot of stuff my family couldn’t afford (or wouldn’t pay for), like a really nice treehouse and a maid that was there all during the week to keep the place spotless. Although, looking at Steven’s house now, it’s clear there wasn’t a huge amount of difference in our lifestyles:

0726-steven

I was reminded of Steven today when I saw this snippet from an article in ZeroHedge which detailed plans of the Japanese government to hand out free money to its citizens in the clumsy hope that it would somehow miraculously stimulate an economy that they’ve unsuccessfully been “stimulating” for literally over a quarter century now.

0726-headline

Here’s what I remembered: I was over at Steven’s house one day (we didn’t have “play dates”; kids just…………showed up) and he mentioned something to me I found very exciting: his dad had told him that you could just write up money on a piece of paper. You just write out the amount of money, and you sign it, and maybe add some artwork, and – voila – money.

Our eyes bugged out at the possibilities. For myself, I consistently saved and scraped together coins to accumulate the seven or eight dollars I needed to buy a plastic model down at the hobby shop. Slowly saving money was really tedious, and the prospect of simply grabbing some paper and pens and whipping up our own cash sounded like a fantastic idea.

So we set to work. I was not much of an artist, nor was he, but we started cranking out various denominations of currency. I remember we didn’t do crazy amounts, like thousand dollar bills, but instead focused on sensible tens and twenties. Somewhere in the back of my little kid head I knew that it was all a bit too good to be true, but we made out our counterfeits anyway.

Reflecting up on this in my adult life, I suspect what happened is that Steven’s father probably mentioned that a person could write a check against his back account on just about anything. In other words, if you had an account with money in it, it was legal to write a “check” on things that weren’t actually printed checks from the bank. As long as it had your account information, your signature, the amount, and the payee, the bank would (probably reluctantly) honor it. So in his mutilating of this information, Steven advised his friend Tim that you could just write up money, just like that.

But the thing that has dawned on me today with this sentimental recollection is that what Japan is doing is no better than what those two little boys in 1970s Louisiana were doing: trying to creating “value” out of absolutely nothing. What we were contemplating doing was, strictly speaking, utterly illegal (although, as kids, it would have simply been laughable). For a government, however, it is policy.

I would thus say Japan (and the U.S. and Europe, for that matter) is being bit as childish as Steven and I were. The difference is that my friend and I got bored with the exercise after fifteen minutes and went off to do something else. The governments of the world…………..they’re going to keep doing this year after year, as long as they possibly can, and God only knows where it’s leading us.

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Catholic Priest Beheaded in France, President Vows to Win War on Terror

The president of France called the beheading of an 86-year-old Catholic priest during a Mass at a Normandy church for which the Islamic State (ISIS) claimed responsibility a “cowardly assassination,” saying ISIS had “declared war” on France. “We must win that war,” he told reporters, according to CNN. “We must fight this war by all means, while respecting the rule of law, what makes us a democracy,” Hollande continued.

The two attackers were shot and killed by police after exiting the church, and one of the worshippers they attacked is in critical condition. One of the attackers was reportedly being tracked by French authorities after a previous terrorism-related charge, and was required to wear an electronic bracelet and live with his parents.

“When a priest is attacked, it is all of France that has been hurt,” France President Francois Hollande said in a statement. The number of self-identified Catholics dropped to 51 percent in a 2007 survey, down from about 80 percent as recently as the early 1990s.

France has been in a terror-induced state of emergency since the Paris attacks in November, with the concomitant crackdown on civil liberties. Hollande says he rejects calls by the opposition for even more terror laws. “Restricting our freedoms will not make the fight against terrorism more effective,” Hollande said.

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The Most Likely Age of Sex Offenders: They Aren’t Old People—They’re 14.

OffenderMy piece in today’s New York Post will probably surprise folks who think the sex offender registry is filled with middle-aged men arrested for luring kids into white vans with the promise of puppies—or even, in a new twist, Pokemon.

But in fact, the most common age that people are charged with a sex offense is 14. That’s according to the U.S. Bureau of Justice. Why so young? I explain:

Because people tend to have sex with people around their own age, which means young people tend to have sex with other young people. And much under-age sex is illegal.

So we keep throwing kids on the registry and labeling them sex offenders, as if they’re incorrigible monsters. But in Britain, a study recently commissioned by Parliament has recommended a totally different course: Trying to understand, treat and refrain from labeling the kids, since children often “make mistakes as they start to understand their sexuality and experiment with it.”

Of course, recognizing that young people experiment would require politicians and law enforcement to also recognize that people can do dumb things, even sexual things, and not be irredeemable monsters. Right now, that’s not a big political talking point. 

So instead, over one fourth of the people we label “sex offenders” get that name when they themselves are juveniles. Considering the registry has over 800,000 people on it, we’re talking about more than 200,000 people who get put on the list while they are in middle school or high school.

What happens when we turn teens and even tweens into sex offenders?

The punishment and stigma can follow them for years, even decades. A study by Human Rights Watch gave the example of Jacob, a boy found guilty of inappropriately touching his sister when he was 11

Because this got him placed on the sex offender registry, he was not allowed to live near other children, including siblings. So he was sent to live in a juvenile home, and eventually placed with foster parents.

Now 26, Jacob is still on the sex-offender registry, still unable to live near a school, playground or park. (Even though study after study has shown these residency restrictions do not make the public any safer.) Meantime, he has had a hard time finding work, because who wants to hire a sex offender?

And so, concluded Human Rights Watch, “his life continues to be defined by an offense he committed at age 11” — an offense that most likely didn’t indicate anything other than a young man in need of guidance.

In my piece, I also describe an incident that happened in New Jersey: Two 14-year-olds pulled down their pants and, disgustingly, sat on two 12-year-olds’ faces. Gross. Reprehensible. But the punishment was even moreso.

Under Megan’s Law, they are now sex offenders, on the registry…for life. 

An appellate court upheld the sentence in 2011, so both young men will be on the sex-offender registry until they die. As 40-year-olds, heck, as 80-year-olds, they’ll be treated as perennial perverts for something they did in junior high.

This is not only horrifying, it flies in the face of what we have learned about sex offenders (and not just the young ones), which is that contrary to public perception, the vast majority of people on the registry never offend again.

In short: Not only is the age that people get on the registry appalling, but so is the registry itself, which has been shown over and over again not to make our kids any safer.

The sex offender laws keep getting more extreme and over-reaching, because pointless excess is an easy way for politicians to act as if they care about kids and safety…while actually ruining people’s lives. Including a lot of 14-year-olds.

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Something Dark Emerges from the Tar Pits and Oil Sands, Destroying Crude Oil Price Rally

This article by David Haggith was first published on The Great Recession Blog.

Crude oil price predictions for summer 2016 are for heavy storms as we move into the Year of the Epocalypse.

The crude oil price rally has been completely crushed, though I’ll admit I was wrong when I predicted crude oil prices would plummet in March or April as the perfect storm developed against oil prices. Instead, they rallied. In spite of that, I continued to believe my error was in timing and not in fact — not in the fact that a another harsh fall in oil prices was beating a path to our doors.

 

Crude oil prices beaten down by a storm still building

 

So, I continued to write articles about the forces building against oil prices, even in the face of a strong rally — a rally that many believed would set a new floor for oil for the remainder of 2016. That storm has, as of today, completely clawed back the post-March rally by taking crude oil prices back to a three month low and to where they stood at the start of the year as well. West Texas Intermediate just struck $42/barrel today.

That said, oil still has not gone back into the dark valley from which it came in the winter of oil’s discontent, and to which I said it would return.

I still believe the full strength of this storm is yet to be felt. So, my oil price prediction is that we hit $30/barrel again, before next March, but probably even by this fall. I have to state a caveat to that prediction … and not because I want to hedge my bet. I don’t like hedging my bets, as I prefer to hit them straight on the nose for a clear victory.

As stated in an earlier article, we have no way of knowing anymore what the Fed with its cloaked operations, liberal hand, and infinite money potential is doing at any moment to manipulate the price of the oil market in the same way it has admitted to doing with the stock market. Anytime the Fed sees oil bringing a serious gale against its heavily encumbered member banks, you can now be sure it will intervene to save the banks (at any cost). The Fed is loathe to let markets be markets and has become so deeply involved in market manipulation that there is no longer any basis for assuming any market will run as a truly free market. (But, if my prediction is wrong, I don’t know how I’ll be able to show it was likely for that reason.)

Nevertheless, I think forces are moving in that will ultimately blow everything outside of the Fed’s control. When we arrive at that inexorable day when all the oil tanks of the world — and all the tankers on land and sea — are full (as I’ve said we are likely to do and as appears to be more the case all the time), it will be hard for the Fed to manipulate the price of oil with nowhere to store the oil it buys. Reality finds a way to leak in or seep out … eventually.

 

Crude oil price storm develops a new front as gasoline storage backs up

 

One of the big drivers in the current price fall is the rise in the number of full tanks on the demand side of refineries. Refined gasoline is starting to back up to serious overflow levels. As things back up on the outflow end of refineries, inflow of crude to the refineries has to be slowed down, so tanks start backing up more on the refineries’ supply end, too.

 

For almost two years, the spotlight in the global oil market has been on a surplus of crude. The latest stumble in prices has shown that the [now] glut extends further…. Combined inventories held by industrialized nations of all forms of oil — from crude to refined products to natural gas liquids — reached a record of more than 3 billion barrels last month…. In the U.S., gasoline stockpiles were at the highest for the time of year since 1984 as record consumption failed to drain the glut refiners created when crude was cheap…. “It is the plight of oil products — in particular the light products such as gasoline — that is slowing the pace of total stock-draws even as crude stocks fall, and of the eventual re-balancing….” [US] gasoline supplies are so swollen that at least five tankers hauling the fuel to New York were turned away over the past few weeks…. Even China, the world’s biggest energy consumer, has been dumping excess gasoline overseas to alleviate swelling stockpiles at home. (Bloomberg)

 

Yes, you read that right. Gasoline stockpiles — right now at the peak season of gasoline demand — are at a thirty-year high! If we cannot work down the oversupply of gasoline during the summer peak demand when everyone in the highly populated northern hemisphere is traveling, what will happen as demand drops off in the fall?

Gasoline inventories have increased four out of the last five weeks at the very time when they should normally be going down due to the normal rise in demand.

 

“We are gradually shifting from a crude glut to a refined product one, particularly in gasoline,” Thomas Finlon, director of Energy Analytics Group said by phone “The gasoline production numbers in the United States are just astounding.” (EconMatters)

 

Why are production numbers astounding for gasoline? Because with a glut that brings cheap crude oil prices refineries are boiling out as much gasoline as possible — more than they can sell — to take advantage of those prices. That is creating a major backup problem on the demand side of refinery storage where the final products are held for sale. (In essence, if your crude oil tanks are full, produce as fast as you can in order to move that oil into your tanks of product for sale … until those tanks are full, too.)

 

The red dragon has too much fuel for its fire

 

The over-abundance of gasoline in storage is certainly not limited to the US. The Great Red Dragon is choking to death on fuel. China is practically dumping gasoline and diesel all over global markets as a result of a supply overbuild already being at its limit throughout the Asian region.

 

The volume of China’s gasoline exports caught up with diesel last month as refiners dumped excess output in overseas markets to alleviate swelling stockpiles at home amid record domestic production. The world’s largest energy consumer more than doubled shipments in June compared with a year earlier…. The flood of shipments from China is exacerbating a glut of fuel across Asia, where processors are cutting operating rates as they grapple with a slump in refining margins…. (Bloomberg)

 

Dutch consultancy PJK International said that gasoline stocks held independently in the Amsterdam-Rotterdam-Antwerp (ARA) hub rose more than 12% to an all-time high. (Zero Hedge)

 

Earlier in the year, China ramped up refinery activity as much as possible in order to build gasoline and diesel inventory while the cost of crude was still in the basement. (Everyone wants to sop up as much cheap crude as they can.) Apparently, they have reached their limit on how much finished product they can store. So, both the supply side and the demand side of refinery storage in China is choked.

In late June, JP Morgan estimated that China had pretty well filled its strategic petroleum reserve tanks where it holds crude.

 

One of the pillars of oil’s recovery from the lowest price in 12 years may be on the verge of crumbling. (Bloomberg)

 

JPM estimates that, as soon as China has topped off their SPR to the brim, China will reduce its crude imports by 15%. (Recently, China has been the world’s largest petroleum importer.) No one knows what China’s maximum storage capacity is for either crude or gasoline, but JPM extrapolated last month that they are close to reaching their maximum based on what is known of their oil data. The rate at which they have suddenly started dumping gasoline on the market indicates their crude oil reserves are full and they are pushing oil through the refineries as quickly as possible and dumping into the market on the other side at minimal margins as everything finally backs up to capacity from the oil wells to the gas-station pumps.

Demand in China for crude oil fell by 2.7% in May; but Chinese imports of crude fell by a mind-blowing 41% year on year.  That China is solving its backup by dumping refined products as exports is reflected in the fact that Chinese exports of refined petroleum products rose by 38% year-on-year in June, even as crude imports fell.

For the time being, pumping out gasoline as quickly as possible has kept China’s drop in imported crude to that 2.7%, but its creating a gasoline glut that is rapidly spreading across the globe. That is already choking China’s production and everyone else’s … all the way back to the pipes of the producers.

That all means we are much nearer that day when all the oil tanks in the world are full, which is extremely bearish for the prices of finished products and crude and should put more pressure on the margins of US refineries and oil producers alike. Certainly, China’s dumping of gasoline and diesel throughout Asia and Europe means that its imports of refined fuels from the US and other nations are terminated for those nations that customarily exported finished petroleum products to China. The market is now saturated everywhere.

 

Worsening inventories in oversupply of crude oil

 

The backup at the outflow end is new, but there is nothing new about the backup in tanks at the inflow end of refineries where crude sits waiting to be turned into gasoline and other products. Inventories on the supply side remain swollen. At 520-million barrels, crude oil supply is more than ten percent higher than where it was this time last year when it began its catastrophic price march downhill.

That combination of supply and demand-side inventory has reached an all-time record of 2.08 billion barrels. Now that refineries have limited places to put the surplus fuels they are producing, they are spinning their wheels in the slick oil sands. Refiners, and not just producers (not always one and the same), are now suffering collapsing margins.

At the same time, we’re nearing another maintenance season, when production is always cut, but that didn’t have much effect last spring as I (and some others) thought it would; but will it help form the perfect storm now that the entire oil industry is starting to choke in overflow?

 

A dangerous new trend line in crude oil prices

 

Zero Hedge published the following graph that shows how crude oil prices fell and rose and fell in 2016 and how that almost exactly matches the pattern of 2015, only at lower price points along the journey:

 

2016 WTI crude oil prices fall, rise and fall to match the pattern of 2015.

 

Demand for crude oil typically falls off during the second half of summer. This year crude prices peaked (for the present, at least) in June and have since slid about 17%. Last summer crude prices also peaked in June, and then July broke their back. The summer before that (2014), crude oil peaked for the year in June and then prices fell off a cliff the rest of the year, dropping 50% by year’s end.

Oil producers are concerned by what is shaping up to look like a new trend in the oil market where prices rally until June and then crashes the entire remainder of they year.

 

US rig count not staying down

 

Because this year’s earlier crude-oil price plunge crippled the US oil industry, the number of rigs drilling new wells began to drop, causing a drop in US crude-oil supplies (and, therefore, a rise in speculative oil prices); but as soon as prices started rising, rig count immediately began to climb back up. The US oil industry, in other words, is not willing to concede its loss of market share without further battles. Last week, the number of oil and gas rigs in the US jumped by fifteen, double the increase of the week before. So, the rate of rise is accelerating.

With a total US rig count of 462, that’s better than a 3% increase in just one month. Since May, oil and gas drilling rig count has risen by 56 rigs (a 14% increase). Still, rig count remains down by 414 rigs from where it was this time last year. At a total of 863 last year, the number was far below the all-time peak of 4,530 in 1981. This last March, the industry saw its all-time low in rig count.

The ramp-up of drilling is happening in oil fields that are profitable below $50/barrel. The moves are small by historic perspective, but, still, not in a direction that helps the price of oil if you’re a hurting oil company, hoping for salvation from a little price relief.

 

Damage to the US oil industry as a result of crude oil prices

 

To give you some idea of how significant damage from low crude oil prices has already been to the US oil industry, the world’s largest oil-field services company (Schlumberger Ltd.) laid off 16,000 workers so far this year as it surprised analysts lowest estimates in this quarter’s reporting with the size of its losses. Second-quarter losses were $2.16 billion, compared to a profit last year (also a lousy year) of $1.12 billion.

 

“In the second quarter market conditions worsened further in most parts of our global operations,” [Schlumberger CEO] Kibsgaard said in the statement. (NewsMax)

 

The world’s second-largest oil-field services provider has not faired well in 2016 either. Halliburton reported a 14-cents-per-share loss for the second quarter. Of course, both companies put as much positive spin on this as being “the bottom” as they could; but is that a real prediction or just CEOs trying to save their stocks from crashing harder with a positive spin?

If the oil surge is hitting the giants of industry this hard, imagine how this storm is pummeling the little guys.

Tightening the vice a little harder, Moody’s just announced that it will start to downgrade the credit ratings of oil producers who are too aggressive in expanding production capacity, given the market’s inability to absorb more capacity.

But it’s not just the oil industry that is feeling the pinch.

General Electric reported a drop in orders, led by oil and transportation decline. They are selling less of their heavy oil-field equipment. Less equipment is also being transported on trains at the same time that less oil is being transported inside the US (as the US cut back production while the Middle East seized market share as it aimed to do). That means fewer GE locomotives are being sold as well.

GE’s total orders feel by 16%, if one excludes the effects of global currency shifts and corporate acquisitions.

I don’t care a wit about greedy oil companies. In other words, I’m not playing a sad song on the fiddle while refineries and producers burn because I’m concerned they’re not making the fat profits they once made (and even taking losses in many cases now), but the fact is that their troubles are having a negative impact on the overall US economy. At the same time, we have not seen any great benefit in the terms of lower fuel prices (compared to the size of the oversupply), but that may change now that a gasoline glut is also building.

 

… and damage to US stocks

 

Naturally, oil industry stocks have declined along with oil prices over the past month, but the losses have an interesting reason for being. What has torn the top off the US stock-market rally in the past week has been oil producers hedging their bets in anticipation of a third crummy year for oil prices now that the end of 2016 is not looking as hopeful as the oil bulls thought it would. They’ve seized the day when stocks have been selling at better prices as an opportunity to sell stocks in order to raise cash and pay off debts, etc.

 

“The producers have sold the hell out of this rally,” said Stephen Schork, president of Schork Group Inc., a consulting firm in Villanova, Pennsylvania…. U.S. oil and gas producers have been selling shares at record speed, using the cash to repay debt or buy oil and gas prospects, bolstering the asset side of the balance sheet. So far this year, companies have raised more than $16 billion in equity, according to data compiled by Bloomberg. “They’re trying to generate cash to stay alive and fight another day,” said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. “The producers know full well that the oil market is not out of the woods yet.” (Bloomberg)

 

Where will this storm the oil market carry us?

 

As I said at the start of the year ,when oil was in its steepest dive and people were speculating that Saudi Arabia and Russia would strike a deal to stop the crash, there was no chance of Saudi Arabia backing off. Saudi Arabia repeatedly made it clear to anyone who was listening that from this point forward the oil market would work itself out by who can produce the most oil the cheapest and claim the largest market share in a oily price and production war. Thus, I also announced the death of OPEC as a price driver a few months ago.

Saudi Arabia, which once controlled market prices by adjusting its own production, decided that the market will decide who the winners are because they are also in the best position to win a price war, having oil that comes at the lowest production costs.

Heavy industry is locking horns all over the world to fight for market share, and the battle is far from nearing resolution.

 

The narrative of a balanced oil market (in the second half of 2016) has so far been an illusion. (Reuters)

 

For more reading on this crude oil price war, see my previous article “Oil Market Snapshots — Will oil supply glut continue, what will happen with oil prices?” if you haven’t read it yet.

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Previewing The Day’s Big Event: What To Expect From The Apple’s Earnings Report

When Apple reports earnings after the close today, all eyes will be on its revenue, specifically how many fewer iPhones it sold in the quarter (consensus expects a drop of 22%), and more importantly profits for one reason: over the past several years Apple has been the single biggest contributor to S&P profitabillity. In 2015, Apple’s profit rose 21% and it made more money than any other company in the S&P500 – at $53.7 billion in net income it accounted for 7% of the S&P’s bottom line.

However, that ended promptly in the first quarter when APPL posted a substantial drop in both EPS and iPhone sales. It is about to get worse: according to Drexel Hamilton’s Brian White, “the company is heading for its biggest iPhone decline ever.”

As such, AAPL is truly in a class of its own, details of which are revealed courtesy of FactSet’s John Butters who writes that for the calendar second quarter (fiscal third quarter for Apple), the current mean EPS estimate is $1.40, compared to year-ago actual EPS of $1.85, a 24.5% decline on the back of a 22% drop in iPhone sales. If Apple reports a year-over-year decline in EPS for Q2 2016, it will mark the second straight quarter that the company has reported a year-over-year decline in EPS. The last time Apple reported two consecutive quarters of annual earnings declines was Q2 2013 through Q3 2013 (fiscal Q3 2013 through Q4 2013 for Apple).

 

As a result of this projected decline in EPS, Apple is expected to be the largest contributor to the expected earnings decline for the S&P 500 Information Technology sector for Q2 2016. The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for the Information Technology sector is -3.9%. Excluding Apple, the blended earnings growth rate for the sector would be 2.2%.

 

More surprising, is that while market participants have a habit of excluding energy companies when looking at S&P performance, what they should be excluding instead is Apple (and Google). As the chart below shows, while the EPS of the S&P500 are expected to decline 3% in Q2, if one excludes just AAPL and GOOG, revenues would increase by 2%, while EPS would rebound 6% Y/Y. In fact, the benefit of excluding AAPL and GOOG for Q2 S&P500 results is greater than excluding all Energy companies.

 

As of today, if Apple reports actual EPS equal to or below the mean EPS estimate for the quarter, it will mark the first time that Apple has been the largest detractor to earnings growth for the Information Technology sector for two consecutive quarters since Q2 2013 through Q3 2013.

Should AAPL disppoint, the responsible culprit will be just one: the iPhone. Over the past three years on average, the iPhone product segment has accounted for about 60% of the total revenues generated by Apple. From Q1 2014 through Q4 2015, the iPhone product segment reported average year-over-year revenue growth of 31%. However, last quarter (Q1 2016), the segment reported a year-over-year decline in revenues of -18%. For Q2 2016, the iPhone product segment is projected to report a year-over-year decline in revenues of -22%.

Still, even in a worst case scenario when AAPL misses already substantially discounted earnings, the story is not over according to Drexel Hamilton. As the abovementioned White writes, “similar to the negative sentiment that engulfed Apple in late 2012 through the summer of 2013, the “gloom and doom” around Apple resurfaced in late 2015 and has picked up steam in 2016. Akin to the dog days of 2013, we believe this summer will prove to be a bottoming process for Apple’s stock with our estimates pointing to a trough in the sales cycle, profit cycle and iPhone unit cycle in the June quarter.”

Then again, perhaps the magic has run out this time. Recall how Apple staged its dramatic recovery last time:

Apple’s launch of the iPhone 6/6 Plus with bigger screen sizes in September 2014 drove a massive upgrade that resulted in 37% iPhone unit growth in FY:15 and the after effect has us modeling an 11% decline in FY:16. This equates to average iPhone unit growth of nearly 13% over this two year period. Given more favorable comparisons and the expected launch of iPhone 7 this September, we believe iPhone units will resume growth in 2Q:FY17 and deliver growth for the full year FY:17. Although we expect a 25-35% YoY total 3Q:FY16 revenue decline in Greater China, India is ramping and we believe Apple has an opportunity to generate $10-15 billion in annual sales by FY:21. For 3Q:FY16, we are modeling iPhone units of 38.55 million and this 19% YoY decline represents the biggest decline ever, but also the trough in this iPhone cycle based on our current estimates.

It remains to be seen if AAPL can pull off two historic comebacks in two years, but for now we will watch what Apple reports after the close, where expectations are as follows:

  • 3Q EPS est. $1.39 (range $1.32-$1.47)
  • 3Q rev. est. $42.1b (range $41.2b-$43.7b); AAPL forecast $41b-$43b (April 26)
  • 3Q gross margin est. 37.9% (range 37.5%-39.5%) AAPL forecast 37.5%-38%
  • 4Q EPS est. $1.60 (range $1.39-$1.77); avg. est. down ~2.2% over past 4 weeks
  • 4Q rev. est. $45.6b (range $42.4b-$49.4b)
  • 4Q gross margin est. 38.4% (range 36.5%-40.0%)

UNIT BREAKDOWN

  • 3Q iPhone unit est. 39.9m (11 ests., complied by Bloomberg News)
  • iPhone ASP est. ~$606 (7 ests.)
  • 3Q iPad unit est. 9.1m (9 ests.)
  • iPad ASP est. ~$443 (5 ests.)
  • 3Q Mac unit est. 4.4m (9 ests.)
  • 3Q Watch est. 2.0m (8 ests.)
  • Watch ASP ~$448 (5 ests.)

ANALYST COMMENTARY

  • RBC (outperform): Expect 3Q rev., units in-line with ests.; potential for “more muted gross margin expansion” in 4Q and beyond due to iPhone SE, at least until iPhone 7 cycle kicks in
    • Investors will focus on iPhone units/mix, operating expense dynamics and whether AAPL will curtail opex given slower demand
  • Nomura (buy): 3Q and 4Q iPhone numbers look “uninspired” as SE demand has exceeded AAPL’s expectations, in part at the expense of 6s units
    • Early indications suggest iPhone demand may steady in 1Q due to iPhone 7 and carrier promotions
  • UBS (buy): Other than solid services growth and maybe some improvement in China, there “probably won’t be too many positives” in qtr, with SE success likely to pressure ASPs
  • Oppenheimer (perform): Doesn’t expect 3Q results and 4Q forecasts to change view on AAPL; investors are looking beyond qtr to iPhone 7 introduction in Fall
    • Expect iPhone 7 product cycle to be weak due to lack of major improvements, with more major update expected in 2017

HISTORICAL

  • AAPL has beaten EPS est. 7 of last 8 qtrs, beaten rev. est. 5 of last 8 qtrs; shrs fell day after 4 of previous 8 qtrs
  • AAPL 43 buys, 7 holds, 2 sells, avg. PT ~$123: Bloomberg data

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(Con)fidence Game

Submitted by Jeffrey Snider via Alhambra Investment Partners,

Oil prices fell again today and it seems that gasoline is now on everyone’s mind. As noted last week, I don’t think that is the reason for the price action except in that it tells a very different story than the one in the media about “stimulus” hope.

The significance of crude and gasoline is the difference in narratives and what is supporting them. Stock prices at record highs, or near them, is likely being driven by renewed hope for monetary policy wherever it may strike, all the while forgetting how patently ineffective past monetary policy has been. The energy sector and the renewed drop in the futures curve (the whole curve, though more so at the front) is remembering the consequences of monetary policy that doesn’t work while at the same time finding still little evidence that anything has changed (and some evidence that if something has changed it is only further in the “wrong” direction). Stocks once more trading, though much less enthusiastically, on what “should be”; energy trading on what actually is. All that is also a replay of last year, specifically last July.

As it turns out, there is a lot more to the gasoline “glut” than just the inventory numbers suggest. It has already become a major factor in actual activity, suggesting that there is a big problem here. In other words, unlike what is believed about monetary policy and especially the whispers of “helicopter money” more recently, the real world has way too much gas to the point of exposing in 2016 as 2015 narrative vs. reality.

In a summer of discontent with high inventories and an unseasonably weak demand, some refiners have started blending winter grade gasoline earlier than usual to sell later in the year, two trading sources told Reuters last week. 

 

The switchover from summer blends, which are more environmentally friendly and costlier to produce, usually happens in August for sale starting on Sept. 15, the date allowed under U.S. government regulations. Winter blends are more likely to evaporate in the summer heat and cause smog.

Betraying these actual physical conditions are news accounts of very “strong” particularly US economic fundamentals as well as near-record stock indices. Some of this disconnecting hope set purposely against physical condition can be traced to what is surely seasonality that escapes the traditional perspective of either recession or not recession. But I don’t think that is the whole story.

ABOOK July 2016 WTI Gas Inventory Last 2

 

There is another element to all this that is undoubtedly more difficult to find and unpack. I think more is occurring than we may be aware, and that includes central banks in places we might not suspect doing things we can’t really define. If all that is a bit too nonspecific, there is a reason – in 2016, specific is a problem.

ABOOK July 2016 More Oil WTI CNY

 

In 2015, central banks were, largely, content to depend upon their narrative of 2014, meaning that weakness was truly believed as temporary and would soon dissipate. The events since the middle of last year showed that was nothing but fantastic folly. But monetary policy around the world still depends upon that narrative, meaning central banks have put themselves in such a bind they can’t really act without confirming they had 2015 all wrong. Discretion is advisable from their perspective; to get the world feeling better without appearing to do much to make that happen. Europe and Japan are the exceptions because there is no ambiguity.

One example, I think, is in oil with the Chinese taking crude rather than “dollars.” Another one may have presented itself in Brazil. The last IMF update (through April) suggests something possibly extraordinary (subscription required).

In February, the net short position was $108.1 billion, practically unchanged going back to September 2015. In March, the net short fell to $105.6 billion; then just $70.7 billion in April. In the breakout for the line in the IMF data, the overall short position itself remained exactly the same, meaning that what changed was the sudden and so far unexplained introduction of long positions in “Financial instruments denominated in foreign currency and settled by other means.” April’s new “long” was more than $30 billion – a huge amount.

In that article, I walk through a potential explanation of what this new “long” position could mean, though I have little hard data so it remains a speculative theory (which is why it stays behind the paywall). The notion is, however, consistent with China taking oil; desperate times call for desperate measures.

SABOOK July 2016 Real Brazil IMF Net Short

SABOOK July 2016 Real Brazil IMF Short v Long

That was always the danger to playing up the middle part of this year as some kind of rebirth. Not only did “they” do the same last year, these sorts of countermeasures, hidden, narrative, or explicit, are asymmetric risks. In other words, the payoff in particularly economic terms was always likely to be both small and improbable; the downside, by contrast, could be enormous in continuing the same line of “harmful” inquiry of markets further dismissing central banks as anything other than bluster.

The financial and economic world in 2016 is, more than anything, a confidence game (dual meaning intended). The year started with confidence severely shaken, so gasoline (as one real economic variable) and hiding intervention (the further hint of desperation) are more likely to have lasting negative effects than effusive but unbacked mainstream praise for the nth year in a row. There are a lot of layers to untangle, but underneath all that it is really simple “dollar” conditions and the imperfect, ill-suited responses to them.  

ABOOK July 2016 Depression2b

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Virginia’s Governor Makes a Mess Out of Restoring Felons’ Voting Rights

Gov. Terry McAuliffeEarlier in the year, Democratic Virginia Gov. Terry McAuliffe made a big splash by declaring that he would, as a blanket measure, restore the voting rights of more than 200,000 released felons.

Republicans immediately resisted the gesture. Grotesquely—and predictably—the debate very quickly became about who these released felons would be voting for, as though that should factor in at all as to whether their civil liberties should be restored.

Republicans challenged McAuliffe’s order in the courts, and Virginia’s Supreme Court just recently ruled 4-3 against McAuliffe.

To be clear, the Supreme Court didn’t rule that McAuliffe couldn’t restore the voting rights of released felons who had done their time and were no longer under state supervision. Rather, McAuliffe essentially tried to expand his own power as governor with a blanket gesture, and the state’s constitution did not give him such authority. He just completely screwed up the process and turned the whole effort into a lesson in the limits of executive authority. From the ruling:

All agree that the Governor can use his clemency powers to mitigate a general rule of law on a case-by-case basis. But that truism does not mean he can effectively rewrite the general rule of law and replace it with a categorical exception. The express power to make exceptions to a general rule of law does not confer an implied power to change the general rule itself. The unprecedented scope, magnitude, and categorical nature of Governor McAuliffe’s Executive Order crosses that forbidden line. …

If the anti-suspension provision has no role to play as a check on any of the Governor’s clemency powers, this view, taken to its logical limits, would empower a Virginia Governor to suspend unilaterally the enforcement of any criminal law in the Code of Virginia, based solely on his personal disagreement with it, simply by issuing categorical, absolute pardons to everyone convicted of his disfavored crime. This view would similarly empower a Governor to issue a single, categorical order restoring voting rights to all felons — even those imprisoned, those subject to a supervised criminal sentence, and those released from prison but later civilly committed as sexual predators — thereby eliminating any remaining vestige of the general voter disqualification rule in Article II, Section 1 of the Constitution of Virginia.

Sen. Tim Kaine, Hillary Clinton’s choice for vice president and former governor of Virginia, was also referenced in the ruling. When Kaine was governor, he was asked to take a blanket action to restore voting rights but determined that he didn’t have that level of power. His counsel at the time wrote the very “notion that the Constitution of the Commonwealth could be rewritten via executive order is troubling.”

Fortunately for felons in Virginia, this doesn’t mean they can’t get their voting rights back. It just means he has to go case by case and do it the “hard,” but legally correct, way, and McAuliffe says he’s going to do exactly that.

There are additional signs that McAuliffe had handled the whole case poorly as well. He refused to publicly release the list of names of felons who would have had their voting rights restored. But those who had seen the list discovered there were people on the list who shouldn’t be there, including felons who were still in prison, as well a couple of fugitives convicted of sex crimes.

The New York Times notes that in order to restore all these felons’ rights the correct way (where he reviews each case), he’d have to sign 385 orders per day for the rest of his term. This suggests that he might not actually review each case as he’s supposed to and could end up right back in court if Republicans challenge him again. McAuliffe, by the way, dismissed the ruling as an “overtly political action,” even though ruling did not even so much as suggest that McAuliffe couldn’t restore felons’ voting rights, just that he couldn’t do it by a massive fiat declaration.

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Are Apple Options Traders Too Complacent Ahead Of Earnings?

Despite the stock's recent demise, and 'shocking' analyst downgrades, Apple options traders appear exceptionally calm ahead of tonight's earnings report…

Even with Apple forecast to post a slide in quarterly earnings after the close, investors are calmer than they were before previous reports. As Bloomberg reports, The CBOE Apple VIX Index, which tracks volatility expectations for shares of the iPhone maker, closed yesterday at its second-lowest level on record before an earnings release, and 16 percent below its one-year average.

 

Options are pricing in a 4.4% gain or drop in the stock after the results, less than its average move following the past four reports.

Since the earnings tumble, it seems the correlation regime of the stock price and volatility has flipped (until very recently).

Charts: Bloomberg

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Why Hillary Is Nervous: “More Leaks May Be Coming”

Over the weekend, Wikileaks posted a treasure trove of emails from various members of the Democrat party which has laid ruin to any hope for civility at the DNC’s convention in Philadelphia.  That said, Hillary’s campaign seems to be even more concerned about what may be leaked next.   

Jennifer Palmieri, Hillary’s communication director, recently told reporters:

The WikiLeaks leak was obviously designed to hurt our convention, I don’t think they’re done. That’s how they operate.  We can’t know, but it’s part of the reason that we wanted people to understand our belief that the Russians are behind this.  People need to understand — when these leaks happen — what they’re designed to do.”

Palmieri added that the Clinton campaign was not worried about it’s own email security…which we’re sure the American people will find very reassuring in the wake of that pesky little FBI investigation in which we learned just how secure Hillary’s email account was.

Palmieri’s comments come as Democrats prepare to officially nominate Clinton for president, making her the first woman to be nominated for president by one of the two major political parties. Judging by yesterday’s intraparty strife, one can only imagine how raucous today’s roll-call will be.

Call us crazy, but the campaign seems to be spending way too much time spinning a narrative about Russian involvement, even going so far as to call on Hillary’s friends at the FBI to look into the issue, for this scandal to fade quietly into the night.  Something tells us that Jennifer knows more than she’s letting on and that we’ll get to review some more leaked emails soon.

Alternatively, we’re sure Bill could arrange for a purely coincidental meeting with Putin on a tarmac somewhere to discuss his “grandchildren” but something tells us his audience might not be as “accommodating” as last time he tried that.


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