Month: December 2014

In retrospect, it should have been obvious in August.

Back then we wrote that the EU’s poorest member nation, Bulgaria, had been an enthusiastic supporter of the Russian-backed South Stream gas pipeline project, whose construction has stoked tensions between the West and Moscow as it enabled gas supply to bypass troubled Ukraine (thus squeezing the desparate economy back into Russia’s hands). In early June, Bulgaria’s Prime Minister Plamen Oresharski ordered an initial halt (after Europe offered the nation’s suddenly collapsing banking system a lifeline). Subsequently, Energy Minister Vasil Shtonov has ordered Bulgaria’s Energy Holding to halt any actions in regards of the project as it does not meet the requirements of the European Commission.

And then, just to send Putin a very clear message where the allegiances of this former Soviet satellite nation lie, NATO deployed 12 F-15s and 180 troops to Bulgaria’s Graf Ignatievo Air Base.

 

A dozen F-15s and approximately 180 personnel from the 493rd, based at RAF Lakenheath, England, have deployed to Graf Ignatievo Air Base to participate in a two-week bilateral training exercise with the Bulgarian air force, Pentagon spokesmen Col. Steve Warren told reporters Monday.

 

The exercise began Monday and will continue through Sept. 1.

 

The purpose of the deployment is to “conduct training and focus on maintain joint readiness while building interoperability,” Warren said.

 

The move comes at a time when America’s Eastern European partners and allies are concerned about Russian military intervention in Ukraine. There are fears that Moscow might try to destabilize other countries in the region.

 

“This is a reflection of our steadfast commitment to enhancing regional security,” Warren said about the exercise.

We concluded as follows: “How will Putin react one wonders?”

We now have the answer: earlier today, in a stunning announcement, Putin revealed that the South Stream project is now finished. As the WSJ reports, “Putin said Moscow will stop pursuing Gazprom’s South Stream pipeline project that would supply natural gas to Europe with an underwater link to Bulgaria, blaming the European Union for scuttling the project.”

“We couldn’t get necessary permissions from Bulgaria, so we cannot continue with the project. We can’t make all the investment just to be stopped at the Bulgarian border,” Mr. Putin said. “Of course, this is the choice of our friends in Europe.”

 

“We think that the European Commission’s position was not constructive,” Mr. Putin said. “If Europe does not want to implement it, it will not be implemented.”

Putin is right: Europe – Austria excluded – had seen rising resistance to the South Stream in recent months as the crisis in Ukraine has intensified. The EU is concerned that the project would cement Russia’s position as Europe’s dominant supplier of natural gas. Russia already meets around 30% of Europe’s annual needs.

So what does Putin do? He signs a strategic alliance with NATO member Turkey, the only country in Europe that is anything but European (over the endless veto of Germany preventing its entrance into the EU over fears of cheap, migrant labor) and which lately has been increasingly anti-Western, to build a new mega-pipeline to Turkey instead. As RT reports, Gazprom CEO Aleksey Miller said the energy giant will build a massive gas pipeline that will travel from Russia, transit through Turkey, and stop at the Greek border – giving Russia access to the Southern European market. In effect, Russia will still have access to the Southern Stream endmarkets

The pipeline will have an annual capacity of 63 billion cubic meters. A total of 14 bcm will be delivered to Turkey, which is Gazprom’s second biggest customer in the region after Germany.

 

Russia’s energy minister Aleksandr Novak said that the new project will include a specially-constructed hub on the Turkish-Greek border for customers in southern Europe.

In a joint press conference between Putin and Turkish leader Erdogan, the Russian said that the supply of Russian gas to Turkey will be raised by 3 billion cubic meters via the already operating Blue Stream pipeline, Last year, 13.7 bcm of gas was supplied to Turkeyvia Blue Stream, according to Reuters.

And another fringe benefit of becoming a preferred Russian ally: Moscow will reduce the gas price for Turkish customers by 6 percent from January 1, 2015, Putin said. Later, Novak said the discount could reach 15 percent, subject to negotiations. Sorry Ukraine.

And sorry Bulgaria, which despite being wholly reliant on Russian gas for its commercial, industrial and residential needs, has decided to side with the sinking European Union, making it merely the latest insolvent vassal state of the sinking Eurozone, something Putin made abundantly clear during today’s conference:

• PUTIN: BULGARIA UNABLE TO ACT AS SOVEREIGN STATE OVER GAS LINK
• PUTIN: RUSSIA TO REORIENT ENERGY RESOURCES TO OTHER MKTS: IFX

Bulgaria should now expect its gas costs to boldly go where Ukrainian energy prices have so boldly gone before.

As for Turkey, the country that bridges Europe with Asia is merely the latest expansion of Putin’s anti-dollar alliance:

• TURKEY, RUSSIA AGREE TO USE LOCAL CURRENCIES IN TRADE: TRT

Or, as Obama would put it, Russia just got even more “isolated.”

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With a market capitalization of around $16 trillion, the NYSE Composite Index is a massively broad equity indicator less affected by the day to day gyrations of AAPL, TSLA, BABA, or NFLX. As NewEdge’s Brad Wishak remarks, the world’s largest market cap equity index is painting a very different picture than that of the Dow or S&P 500…

 

 

Not only is there no breakout to new highs, you have a potential failure developing, not only at old swing resistance but more importantly at the old uptrend line.

 

As Wishak concludes – one for the radar.

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Behold, politics…

 

 

Source: Grant Williams @TTMYGH

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Goldman Sachs' 2015 global equity views and themes note is out and its title "The Long Grind Higher Continues" says it all… it's muppet slaughtering time…

As we look into 2015 we have several broad views on equities:

• Overall returns are likely to be somewhat lower in 2015 and beyond compared with average returns since 2009, particularly in the US
• But we continue to expect much better returns in equities than bonds
• We see higher local currency returns outside of the US, but much more similar returns in common currency as we expect the dollar to strengthen further
• While differences exist across markets there are common themes – positioning for dollar strength and growth differences (US relative to Europe for example) is one, and looking for total cash returns is another
• The regions with the most monetary policy easing are also the ones with the best return forecasts

1) More specifically, in terms of the overall returns, the exhibit below shows the forecasts that we have both for 2015 and, on a CAGR basis, out to 2017. Total returns (including dividends) are expected to be lowest next year in the US at 3% and highest in Japan with a forecast rise in Topix of around 21%. However, when adjusted for currency most markets are expected to enjoy similar high-single-digit returns; given smaller FX moves, Asia becomes a better prospective performer than Europe. The CAGR between now and end 2017 on our forecast implies a much lower return than we have generally seen since the market lows in 2009. On average global equity markets have achieved an annualised return of around 20% since this trough, while we are now expecting CAGRs of between 3% and 11% (again with Japan as the highest and the US as the lowest) in local currency.

2) Nonetheless the expectations for still low inflation mean that these expected returns are still quite high in real terms relative to history, with the exception of the US where they are slightly below (38th percentile). The chart below shows our expected 1 year total real return forecasts relative to the historic distribution of 1-year annualised total real returns in the US.

3) More strikingly our forecasts suggest much better returns in equities than in government bond markets. While we expect bond yields to rise through next year, we expect the increase to be moderate, even in the US where policy rates are forecast to rise in 3Q. A rise in Fed funds rates is likely to impact the US market and compress valuation multiples moderately. It is also likely to maintain the rise in the dollar which, as yet, has only started what may be a multi-year appreciation. Specifically we expect the euro to fall to $1.15 by end 2015 and the yen to reach 130/US$.

4) Looking at the regions, we see the biggest absolute rise in Japan, where Kathy Matsui and team have emphasised a number of supportive factors. First the recent expanded and open-ended QQE, the GPIF’s new asset allocation, the VAT hike postponement and, next year, cuts in the corporation tax rate that reflect the important support from a policy perspective. These are likely will be bolstered by a number of important reforms in 2015 including the launch of the taxpayer ID system, immigration reforms, the re-starting of the nuclear plants and also the female participation package. Second, these policy measures are backed by improving fundamentals; record ROEs, steady top-line growth and the weaker yen. Third, valuations remain attractive by historical comparison with the FY2015E P/E at 12.7 and P/B at 1.3x. Fourth, structural reforms are finally taking hold with a strong focus on shareholder returns pushing dividends and buy backs to record levels (1HFY2014 dividends reached a record Y3.2 tn and share buybacks rose 58% yoy).

5) In Europe the fundamentals (both economic and profit growth) remain poor. For the euro area, GDP is expected to rebound only moderately by 0.9% while the UK GDP growth is expected to slow to 2.8%. Corporate profits are now rising, but only just; we expect 2014 to see 3% profits growth with a rise to 6% in 2015, over 60% of which is driven by financials. However, as we described in our outlook, while our central scenario was for a modest rise in the main European markets, the risks were to the upside given the potential for policy intervention to reduce the implied risk of deflation. Mr. Draghi’s speech last Friday suggested that the chances of outright sovereign bond QE had become more likely than not for 1H2015. If the ECB adopts QE we would expect it to do so decisively with a bold and large programme. While by no means a certain outcome, and with limited probable impact on long-term growth, this possible crossing of the rubicon could be game changing for markets. The equity risk premium remains very high – a 1 percent fall is worth around 20% on the SXXP. As with the policy interventions that followed the ‘do whatever it takes’ comment in the summer of 2012, there is plenty of scope for a lower risk premium to boost valuations and add to the returns. Furthermore, investors have become very sceptical. The most recent US balance of payments TIC data shows that US investors sold a record net €27 bn in September alone. We have recently upgraded our forecasts to reflect the rising probability of QE and are now expecting 390 on SXXP by end 2015 (roughly 12% price return) and 3800 on SX5E (roughly 17% price return). Within Europe we favour MIB and IBEX as we also recommend a long position in a basket of 10 year sovereign debt in Spain, Italy and Portugal relative to France and Germany.

6) For Asia Tim Moe and team expect single-digit earnings growth for both 2015 and 2016 and, with little room for valuation expansion, forecast the Asia pacific ex Japan (MXAPJ) to reach 520 over 12 months, a price return of 9%. However they see quite wide dispersion across the markets with their favourites being Indonesia (raised to overweight) and Taiwan, China, India (staying as overweight). An additional attraction for Asia is its exposure, in parts, to a stronger US economy and lower FX risks than for Japan and Europe. Meanwhile under the hood there are some exciting opportunities that include beneficiaries of reform, mainly in China and India, the growth of the internet in India, Taiwan (the Internet of things theme) and mega caps in Korea.

7) The US market has enjoyed a strong period of outperformance and for good reason. Growth is strong; our current activity indicator puts it at over 4% with the prospect of 3% or more growth through to 2017. Nonetheless, profits have reached an all-time high and growth is now slowing. David Kostin and team expects just 5% profit growth over 12 months, half the current bottom up consensus. Meanwhile the prospect for policy rate tightening within a year is likely to finally push the multiple down moderately. The combination leaves just moderate returns of 3% for 2015E. The domestic economy should be strong and a good source of opportunity for investors as real incomes rise, particularly relative to the more internationally exposed stocks where the strength of the USD is likely to weigh on earnings.

8) In terms of themes, positioning for dollar strength and US relative economic strength are common across the markets. For the US this makes domestic stocks more attractive, particularly relative to those with high European sales growth (GSTHAINT v GSTHWEUR). For Asia it is reflected in our recommendation to be long Asia stocks with high US exposure and underweight those with high Europe revenues (GSSZAPUS v GSSZAPEU). In Europe our international basket of stocks that has high global exposure and benefits from Euro weakness also reflects this relative growth and currency divergence (GSSTEURO v SXXE) while in Japan we like a weak yen beneficiaries basket (GSJPFXW1).

9) Another theme which is reflected across markets is the ongoing desire for income and cash return in a world of near zero rates. In the US capturing companies buying back shares or delivering high cash returns has proved a good strategy over the past year and remains attractive (GSTHCASH/SPX). The shareholder return theme is also reflected in Kathy and team's recommendation to be long stocks generating superior shareholder return (GSJPSHHR) as well as the dividend yield and growth basket in Europe (GSSTHIDY/SXXP).

10) Amongst the key risks politics features more highly than generally in the past. Geopolitical tensions could spill over into willingness to take risk. Europe has important elections next year in the UK, Greece, Spain and Italy. In Asia too there are important regional elections in 2015/16 while reform efforts will impact China, India and Indonesia. There are, of course, downside risks to growth too, but on balance we see these risks more skewed to the upside relative to what equity markets have priced. Another important upside risk along this dimension is the possible boost from lower energy prices (we forecast US$84/bbl average for Brent in 2015). Of course this boost is likely to be greatest for the US but should not be dismissed for other countries too.

11) In general we expect the macro backdrop to be supportive of low volatility and, with it, low dispersion. Alpha is therefore likely to be key in most markets. However the differences in market prospects and volatility curves mean that we recommend selling S&P500 calls to enhance US returns, while we In Europe, where the volatility curve is flatter, favour buying long dated calls on the Eurostoxx 50.

*  *  *

Trade accordingly…

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Filed under “insane paragraph of the year,” Reuters pens one of the most-telling sentences of the year/decade/century, suggesting – as per the existential threat to the Fed’s meme – that consumers are worried that their cost of living won’t go up more?

 

via Reuters

Translation: Please dont lose faith that your cost of living will stop soaring: the Fed’s very existence depends on it.

 

h/t @RudyHavenstein

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As noted previously, total US debt is now over $18 trillion. Here is where it gets even more surreal: debt held by the public on January 20, 2009, Obama’s inauguration day, was $6.3 trillion. It is now $12.9 trillion, a 105% increase.

 

And here, for your viewing pleasure, is Senator Barack Obama saying on July 3, 2008, that the $4 trillion in debt added by Bush was “irresponsible and unpatriotic”…

That is all.

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Submitted by Tim Price via Sovereign Man blog,

So the Swiss have decided not to force their central bank into underpinning its reserves with harder assets than increasingly worthless euros.

At least they had the chance to vote.

But in the bigger picture, the rejection of the “Save Our Swiss Gold” initiative flies in the face of a broader trend towards repatriation and consolidation of sovereign bullion holdings – following on the heels of similar attempts by the Bundesbank, the Dutch central bank, for example, recently announced that it had moved a fifth of its total gold reserves from New York to Amsterdam.

And the physical metal continues its inexorable exodus eastwards, into stronger hands that are unlikely to relinquish it any time soon.

*  *  *

The Swiss vote was preceded by some fairly extraordinary black propaganda, most notoriously by Willem Buiter of the banking organisation that now styles itself ‘Citi’.

Once again we were treated to the intriguing claim that gold is nothing more than “a six thousand year-old bubble”, and a “fiat commodity currency” (whatever that might mean) that has “insignificant intrinsic value”.

Izabella Kaminska for the FT’s Alphaville republished much of Buiter’s ‘research’; the resultant to-and-fro between FT readers on the paper’s website makes for a fascinating scrap between goldbugs and paperbugs.

Among the highlights was Vlady, who wrote:

“When a social construct (gold as money) survives for 6,000 years I would expect curious people to inquire as to whether it is tied to some immutable underlying law, or otherwise investigate if there is something more here than meets the eye.  Not so curiously inclined, our court economists prefer to write this off as a 6,000 year old delusion. That says a lot about the sorry state of the economics discipline today.”

Another was the artfully named ‘Financially Repressed by Central Banks’, who wrote:

“I am not a gold bug, but I am a hard working taxpayer who is getting pretty fed up with having my savings earning no interest and possibly being devalued (see Japan) and of not being able to find any sensible place to invest my hard earned due to central bank policies making it impossible to make any return anywhere without taking crazy risks.”

The financial markets feel increasingly unhinged. All-time low bond yields co-exist with all-time high stock markets.

Oil has collapsed along with much of the commodities complex. Emerging market currencies have been hit for six. China threatens the West with another strong deflationary impulse.

Gold is difficult to value at the best of times, in large part because it’s not a productive asset, and partly because it’s conventionally priced in a currency (the dollar) that, like all others, is destined to lose its purchasing power over time.

Viewed purely through the prism of price, gold increasingly feels like something close to a ‘value’ investment, given that ‘value’ investing is essentially about picking up dollar bills for something closer to fifty cents.

We’re currently reading Christopher Risso-Gill’s biography of the legendary ‘value’ investor Peter Cundill, and some of Cundill’s diary entries seem to be peculiarly relevant to this strange, dysfunctional environment in which we are all trapped.

One in particular stands out, which Cundill himself wrote in upper case to make his point:

“THE MOST IMPORTANT ATTRIBUTE FOR SUCCESS IN VALUE INVESTING IS PATIENCE, PATIENCE, AND MORE PATIENCE. THE MAJORITY OF INVESTORS DO NOT POSSESS THIS CHARACTERISTIC.”

*  *  *

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Last week, total US debt was a meager $17,963,753,617,957.26. Two days later, as updated today, on Black Friday, total outstanding US public debt just hit a new historic level which probably would be better associated with a red color: as of the last work day of November, total US public debt just surpassed $18 trillion for the first time, or $18,005,549,328,561.45 to be precise, of which debt held by the public rose to $12,922,681,725,432.94, an increase of $32 billion in one day.

It also means that total US debt to nominal GDP as of Sept 30, which was $17.555 trillion, is now 103%. Keep in mind this GDP number was artificially increased by about half a trillion dollars a year ago thanks to the “benefit” of R&D and intangibles. Without said definitional change, debt/GDP would now be about 106%.

It also means that total US debt has increased by 70% under Obama, from $10.625 trillion on January 21, 2009 to $18.005 trillion most recently.

And now we wait for the US to become Spain, and add the estimated “contribution” from hookers and blow to GDP, once again pushing the total debt/GDP ratio below the psychological 100% level.

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